subject: Tax Records You Can Dispose Of [print this page] Tax Records You Can Dispose Of Tax Records You Can Dispose Of
Tax Records You Can Dispose Of
Summer is a perfect time to clean out the mountain of tax and financial papers that clutter your home and office. Here's what you need to keep and what you can throw out without fearing the wrath of the IRS.
The IRS statute of limitations limits the number of years during which the IRS can audit your tax returns. Once expired, the IRS is prohibited by law 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. Once the statute of limitations has run, the IRS can't go after you for additional taxes, but you can't go after the IRS for additional refunds, either.
Three-Year Rule
For assessment of additional taxes, the statute of limitations 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 never begins to run. The IRS can, in fact, get you at any time.
If you're deciding what records you need or want to keep, you have to ask what your chances of an audit are. 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.
If you file on time and pay what you should, you only have to keep your tax records for three years, but some records have to be kept longer than that.
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.
Checklist Of The Documents You Should Keep.
Capital gains and losses. Your gain is reduced by your basis -- your cost 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.
So don't throw these records away until after you sell the securities. If you're audited, you're going to have to prove those numbers. So you'll need to keep those records for at least three years after you file the return reporting their sales.
Home expenses. Cost records for your house and improvements to your house should be kept until the home is sold. It's 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 on a joint return), 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.
Business records. Business records can be a nightmare. Commercial real estate is depreciated over 39 years. You can be audited on the depreciation up to three years after you file the return for the 39th year.
Employment, brokerage and bank statements. Keep all your W-2s, 1099s, brokerage and bank statements to prove income until three years after you file or longer if you need to. Don't dispose of checks, receipts, mileage logs, tax diaries and other documentation that substantiate your expenses.
Tax returns. It is a good idea to keep copies of your tax returns. You shouldn't rely on the IRS to have a copy of your old returns. I recommend my clients keep tax records for 6 years.
You need 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 records for Social Security purposes, it is a good idea to check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If they're incorrect, 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 verified those contributions.
You can confirm your payments and estimate future benefits by filing Form SSA-7004 with the Social Security Administration. You can download the form, or apply online.
