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Tax Record Retention, How Long Is Long Enough?
– January 18, 2012
Another year has come and gone and soon you’ll be accumulating your tax information to take to your CPA. Each year it seems like the mounds of paper get bigger! After your tax returns are filed what should be done with all those documents?
Tax record retention is a common question asked by many of our clients each year. The following discussion is related to record retention for an individual return and the documents supporting its contents. We hope this information will aide you in determining what records to keep and what records to discard, thereby ridding yourself of useless clutter piling up in your home. Remember, when you dispose of any documents, be sure to shred them! You definitely don’t want to have your identity stolen.
Federal law requires you to maintain copies of your tax returns and supporting documents for three years. These records may have to be produced if the IRS (or state or local taxing authority) were to audit your return or seek to assess or collect a tax. Additionally, lenders or other private parties may require you to produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you.
Except in cases of fraud or substantial understatement of income, the IRS can only assess tax within three years after the return for that year was filed (or, if later, three years after the return was due). The assessment period is extended to six years if the IRS believes you have significantly underreported your income (whether or not intentionally, by 25% or more) or believes there may be an indication of fraud.
If the IRS claims you never filed a tax return for a particular year, it can assess tax for that year at any time (even beyond three or six years), unless you can prove that you did file. Proving that you filed would be impossible after you have discarded your returns. Since it’s not possible to be completely sure the IRS won’t at some point seek to assess tax, we recommend retaining tax returns indefinitely and the tax return supporting documents for six years after the return is filed (or, if later, six years after the return was due).
Records relating to property transactions may need to be kept longer. The tax consequences of a transaction that occurs in one year may relate back to events that happened in earlier years. The period for which you should retain records must be measured from the year in which the tax consequences actually occur. For example, if you sell real estate that you bought many years ago and subsequently added improvements, you should keep records of both the purchase and the improvements for at least six years after you file the return for the year of sale.
If you bought or sold stocks, bonds, mutual funds and other investments, similar considerations apply. Remember, if you reinvest dividends to buy additional shares of stock, each reinvestment is a separate purchase of stock. The records of each reinvestment should be kept for at least six years after the return is filed for the year in which the stock is sold.
Be sure you have access to any tax records affecting you that are kept by your spouse if separation or divorce becomes a possibility. Better still, make copies of the tax records since relations may become strained and access to the records may prove difficult.
Copies of all joint returns filed and supporting records are important since both spouses are mutually responsible for the liability on a joint return and a deficiency may be asserted against either spouse. Also include with your records agreements or decrees over custody of children and any agreements as to who is entitled to claim an exemption for them. Your records should include a copy of the divorce decree or agreement of separate maintenance, which may be needed to substantiate alimony payments and distinguish them from child support or property settlement payments.
Keep records of the cost of all jointly owned property. Obtain records as to the cost or other basis of all property your spouse or former spouse transferred to you during your marriage or as a result of the divorce. Your basis in that property is the same as your spouse’s or former spouse’s basis in the property.
If you’re unsure whether or not to discard a particular document be sure to contact your CPA and seek their advice.
Harry G. Prophit, IV, CPA
Tax Manager
Heard, McElroy & Vestal
(318) 807-3029
hprophit@hmvcpa.com
Harry specializes in both audit and tax services. He began his accounting career in 1978 with Bradley, Heller & Co., CPAs in Monroe, LA. The firm merged to form Malone, Walker, Bradley, Heller & Martin, CPAs where Harry served as partner until becoming the CFO of a publishing company and its affiliated closely held companies. Harry returned to public accounting in 2006 and currently works out of our Monroe location.
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