Spring is a great time to clean out that growing mountain
of financial papers and tax documents that clutters your home and
office. Here's what you need to keep and what you can throw out without
fearing the wrath of the IRS.
Let's start with your "safety zone," the IRS statute of limitations. This limits the number of years during which the IRS can audit your tax returns. Once that period has expired, the IRS is legally prohibited from even asking you questions about those returns.
The concept behind it is that after a period of years, records are lost or misplaced and memory isn't as accurate as we would hope. There's a need for finality. Once the statute of limitations has expired, the IRS can't go after you for additional taxes, but you can't go after the IRS for additional refunds, either.
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The Three-Year Rule
For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. If you're looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax. There are some exceptions:
Remember, the three-year rule relates to the information on your tax return. But, some of that information may relate to transactions more than three years old.
Here's a checklist of the documents you should hold on to:
Let's start with your "safety zone," the IRS statute of limitations. This limits the number of years during which the IRS can audit your tax returns. Once that period has expired, the IRS is legally prohibited from even asking you questions about those returns.
The concept behind it is that after a period of years, records are lost or misplaced and memory isn't as accurate as we would hope. There's a need for finality. Once the statute of limitations has expired, the IRS can't go after you for additional taxes, but you can't go after the IRS for additional refunds, either.
http://bookkeepergirlsinc.brandyourself.com
The Three-Year Rule
For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. If you're looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax. There are some exceptions:
-
If you don't report all your income and the unreported amount is
more than 25% of the gross income actually shown on your return, the
limitation period is six years.
-
If you've claimed a loss from a worthless security, the limitation period is extended to seven years.
-
If you file a "fraudulent" return, or don't file at all, the
limitations period doesn't apply. In fact, the IRS can get you at any
time.
- If you're deciding what records you need or want to keep, you have to ask what your chances are of an audit. A tax audit is an IRS verification of items of income and deductions on your return. So you should keep records to support those items until the statute of limitations runs out.
Remember, the three-year rule relates to the information on your tax return. But, some of that information may relate to transactions more than three years old.
Here's a checklist of the documents you should hold on to:
-
Capital gains and losses. Your gain is reduced by
your basis - your cost (including all commissions) plus, with mutual
funds, any reinvested dividends and capital gains. But you may have
bought that stock five years ago and you've been reinvesting those
dividends and capital gains over the last decade. And don't forget
those stock splits.
You don't ever want to throw these records away until after you sell the securities. And then if you're audited, you'll have to prove those numbers. Therefore, you'll need to keep those records for at least three years after you file the return reporting their sales.
-
Expenses on your home. Cost records for your house
and any improvements should be kept until the home is sold. It's just
good practice, even though most homeowners won't face any tax problems.
That's because profit of less than $250,000 on your home ($500,000 on a
joint return) isn't subject to taxes under tax legislation enacted in
1997.
If the profit is more than $250,000/$500,000, or if you don't qualify for the full gain exclusion, then you're going to need those records for another three years after that return is filed. Most homeowners probably won't face that issue thanks to the 1997 tax law, but of course, it's better to be safe than sorry.
-
Business records. Business records can become a
nightmare. Non-residential real estate is now depreciated over 39
years. You could be audited on the depreciation up to three years after
you file the return for the 39th year. That's a long time to hold on
to receipts, but you may need to validate those numbers.
-
Employment, bank, and brokerage statements. Keep all
your W-2s, 1099s, brokerage, and bank statements to prove income until
three years after you file. And don't even think about dumping checks,
receipts, mileage logs, tax diaries, and other documentation that
substantiate your expenses.
-
Tax returns. Keep copies of your tax returns as
well. You can't rely on the IRS to actually have a copy of your old
returns. As a general rule, you should keep tax records for 6 years.
The bottom line is that you've got to keep those records until they can
no longer affect your tax return, plus the three-year statute of
limitations.
-
Social Security records. You will need to keep some
records for Social Security purposes, so check with the Social Security
Administration each year to confirm that your payments have been
appropriately credited. If they're wrong, you'll need your W-2 or copies
of your Schedule C (if self-employed) to prove the right amount. Don't
dispose of those records until after you've validated those
contributions.
Contact us by phone or email if you have any questions about what records you need to keep this spring.
