Generally, tax records should be kept for two basic reasons:
- In case the IRS or a state agency decides to question the information reported on a tax return, and
- To keep track of the tax basis of capital assets so that the tax liability can be minimized when you dispose of it.
With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years, if a taxpayer omits from gross income an amount that is more than 25% of the income reported on a tax return. And, of course, the statutes don’t begin running, until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return to evade tax. If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded. You should add a year or so if you live in a state with a longer statute.
Examples: Sue filed her 2010 tax return before the due date of April 18, 2011. She will be able to dispose of most of her records safely after April 15, 2014. On the other hand, Don filed his 2010 return on June 2, 2011. He needs to keep his records at least until June 2, 2014. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.
The problem with the carte blanche discarding of records for a particular year is that the statute of limitations may be different depending on what it is. Many taxpayers combine their normal tax records and records needed to substantiate the basis of capital assets. These need to be separated to prevent the basis records from being discarded before their statute expires (see below). Thus, it makes more sense to keep your tax records separated by asset. The following are examples of records that fall into that category:
- Stock Acquisition Data: If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit (or loss) you had on the sale.
- Stock and Mutual Fund Statements (where you reinvest dividends): Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain, when it is eventually sold. Keep statements at least four years after the final sale.
- Tangible Property Purchase and Improvement Records: Keep records of home, investment, rental property or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.
If you have questions about whether to retain certain records, call your Tax Consultant. After all, it is better to make sure before discarding something that might be needed later.
Disclosures
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
