When in Doubt, Don't Throw it Out!
As you begin to accumulate your tax records for your tax return - and space in your file drawers or file boxes becomes limited - you may be tempted to throw away your previous years' records. And that's probably when you wonder: Do I really need these records? Why? And how long do I have to keep them? Here are the answers to commonly asked questions about record-keeping.
- Q: How long am I required to keep tax records from prior years?
- A: Unfortunately, there is no hard-and-fast rule. Differences in each person's individual situation affect what records to keep and how long to keep them. Generally speaking, receipts, canceled checks, and other written documentation should be kept for three years.
- Q: Why is it important to keep such records for three years?
- A: The IRS has up to three years from the date the return was filed or from the date it was due (whichever is later) to question your tax return. However, in certain situations that time period can be extended.
- Q: Under what circumstances can the IRS audit a return that is more than three years old?
- A: If the IRS claims that you have underreported your gross income by 25 percent or more, the statute of limitations is extended to six years. Also, if the IRS alleges fraud, you'll need to keep your records at least until you are cleared in a tax examination. (If a return is found fraudulent, there is no statute of limitations.)
- Q: How can l avoid problems?
- A: Because the IRS can claim that there was a substantial underreporting of your income and extend the statute of limitations period to six years, it's wise to keep supporting records for a minimum of six years This is especially important if you have self-employment income or tip income, which may not be substantiated by pay stubs or W-2s.
- Q: Are there any other records I should keep beyond three years?
- A: Yes. Any records you will need to file a future tax return should be kept-or you may end up paying more than necessary in taxes. For example, records pertaining to the purchase or improvement of your home should be kept at least until your home is sold. However, if you sell your home and purchase another--and subsequently defer payment of tax on any gain-it's important to keep your records until you sell your most recently purchased home with no additional rollover. If you or your spouse is self-employed or has a sideline business and your tax return shows a net operating loss that is being carried forward, you should retain all your records, supporting those losses until the losses are used or the time limit for using them expires.
- Q: How long should I keep records of my stock transactions?
- A: You should keep all records pertaining to the purchase of stock until the stock is sold. If dividends from stock are reinvested, records showing the amount of the dividend and the number of shares purchased should also be kept until the stock is disposed of. This will increase your basis--and lower your tax bill.
- Q: What about IRA records?
- A: As a result of tax law changes in the last several years, many IRA contributions are no longer deductible. As a result, it's important to keep all IRA records until the funds are withdrawn. Failing to do so may result in paying tax on these contributions twice.
- Q: How long should l keep my tax return?
- A: Tax returns should never be thrown away, because they are your only evidence that a tax return was filed. If you can't prove that you filed a tax return-and the IRS claims you did not--the statute of limitations will never close.
- Q: I've lost some of my old tax returns. Now what do I do?
- A: If you used a tax preparer, he or she may have a copy of your tax return on file. If you are unable to locate past years' tax returns, you can obtain a copy from the IRS by filing Form 4506. Request for Copy of Tax Form, and mailing it to the service center where you sent the return.