Tax
and Business Alert – April 2024
624 words
Abstract: Generally, the IRS has three years to audit a
tax return, from the later of the due date of the return, or the date the
return is filed. But many exceptions exist that make it prudent to keep
financial records even longer. Some states also have different records
retention requirements. Here’s the lowdown on records retention, broken down by
various types of documentation.
Tax records: What can you toss and what should
you keep?
Generally, the IRS has
three years to audit a tax return, from the later of the due date of the
return, or the date you file. You can also file an amended return within this
time frame if you overlooked something. Here’s what you need to know about
keeping financial records involved in your tax returns.
Federal tax records
Despite the three-year
guideline, many tax advisors recommend retaining copies of your finished tax
returns indefinitely to prove that you filed. Even if you
don’t keep returns indefinitely, at least keep them for six years after the
returns are due or filed, whichever is later. It’s a good idea to keep the records
that support items on your individual tax return until the three-year statute
of limitations runs out. Supporting records include canceled checks, charitable
contributions receipts, mortgage interest payments and retirement plan
contributions. These documents may also support an amended tax return if you
find you overlooked something.
So which records can you
throw away today? Based on the three-year rule, generally you’ll soon be able
to throw out most records associated with your 2020 return if you filed by the 2020
due date (which was extended to May due to the pandemic). Extended 2020 returns
could still be vulnerable to audit until October of 2024.
Also, some tax issues
are still subject to scrutiny after the three years. If the IRS suspects that
income has been understated by 25% or more, the statute of limitations for
audit rises to six years. If no return was filed or if fraud is suspected, there’s
no limit of time for the IRS to launch an inquiry.
Certain records that support
figures that may affect multiple years, such as carryovers of charitable
deductions, should be saved until the deductions no longer have effect. Also,
don’t toss out records that support deductions for bad debts or worthless
securities that could result in refund claims, because you have up to seven
years to claim them.
State tax records
The previous guidelines
are geared toward complying with federal tax obligations. We can instruct you
regarding your state’s statute of limitations.
Plus, states generally
have the right to resolve their own issues related to federal tax returns that
have been audited. So, hold on to records related to an IRS audit for a year
after it’s completed.
Real estate records
Retain real estate
records for as long as you own a property, plus three years after you dispose
of it and report the transaction on your tax return. Throughout ownership, keep
records of the purchase, home improvements, relevant insurance claims and refinancing
documents.
These documents help
prove your adjusted basis in the home, which is needed to figure any taxable
gain at the time of sale. They can also support rental property or home office
deductions.
Investment account statements
To accurately report
taxable events involving stocks and bonds, you must maintain detailed records
of purchases and sales. Records should include dates, quantities, prices,
dividend reinvestment and related expenses. Keep these records for as long as
you own the investments — plus additional time until the statute of limitations
for the relevant tax returns expires.
The IRS requires you to
keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn
from your IRAs. It’s even more important to retain records of all transactions
relating to Roth IRAs, in case you’re ever questioned.
Purge with caution
Old tax records take up
space and could lead to stolen identities if not properly disposed of. But
purging too soon may leave you without a defense if the IRS has questions. When
in doubt, hang on to records a little longer than you think is necessary. Contact
us with questions.
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