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Retaining tax records?

How long one needs to retain tax records is an FAQ and although there are general rules, they are general and your personal understanding of the basic rules along with your own judgment should not be ignored or fully delegated.  As a former IRS attorney and long time real estate, business and family law litigator I offer the below to increase your understandings and to enhance your judgment in this area.

Even taxpayers with relatively simple returns and supporting documents may still have an a troubling volume of tax records accumulated – and from there we have the query:  How long should one hold on to tax records?

The answer depends on the types of documents and transactions involved.  If one has been a tax-records collector for many years it is likely that disposing of the oldest of such records can be safely done.

The basics:  One must keep tax records that support the income, deductions, and credits thereon for its limitation period.

The “limitation period” refers to the amount of time one has to amend a return to claim a credit or a refund or in which the IRS can assess additional taxes. As a general rule the limitation period for a return is three years after it has been filed.   For an early filing the period runs from the date the return was due.

The primary exceptions to these limitations periods occurs when one fails to report income in an amount that is more than 25% of the gross income shown on their return.  In these cases one is required to keep the records for six years. If one files an amended return seeking a credit or refund then records are to be kept for either three years from the date the original return is filed or two years from the date the tax is paid – whichever is later.

If a claim for a loss from worthless securities or a bad-debt deduction is taken, relevant records are to be kept for seven years.  Employers should retain all employment tax records for at least four years after the tax was due or has been paid, whichever is later.

For un-filed returns or those found to be fraudulent, records are to be kept indefinitely.  This is so because limitation periods do not even commence until a return is filed or a fraud is discovered.

For logical reasons some records need to be kept for extended periods.  Such records are those relating to securities, real estate, nondeductible contributions to retirement accounts and home improvement expenditures.  These records are needed so long as one has such an item or its “off-spring” in his estate.

If one has storage space concerns there is some good news as the IRS allows taxpayers to store tax documents electronically – whether originated electronically or not.

Do call us for a free phone evaluation of any tax audit or tax collection problems you or yours may have to see if we can be of help.



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