Keeping Income Tax Records

This is the time of year where everyone needs to pay extra attention to there mail.  You will start to receive tax information from your employer, bank, investment companies, mortgage company, and others.  It is important to gather the documents and keep them together so when it is time to prepare your taxes, you have them. Missing one item on your return may subject you to an audit or cause you to pay a tax preparer to file an amended return. 

You need to keep good records for more than filing your taxes. With the federal deficit expected to be at an all time high, the IRS will be cracking down on tax cheats and possibly doing more audits.  If you happen to get audited you want to make sure you have all the documentation for your deductions and credits.  With lending standards tightening and banks requiring more documents to get a loan, having your records organized will make the process that much easier. If you are looking for either tax advice or financial advice providing a few years worth of tax returns will provide the advisor with an easy and quick view of your overall financial picture.  

Many people ask how long they should keep tax returns and records.   Publication 552  suggest that,

“You must keep your records as long as they may be

needed for the administration of any provision of the Internal

Revenue Code. Generally, this means you must keep

records that support items shown on your return until the

period of limitations for that return runs out.

The period of limitations is the period of time in which

you can amend your return to claim a credit or refund or the

IRS can assess additional tax…”

 

This means you should keep records for 3-7 years.  I would suggest you keep a copy of your return forever and dispose of some of the supporting documents after 3-7 years.  If you own property you will want to keep capital improvement records for as long as you own the property and 3-6 years after the property is sold. 

If you own a business, which has different requirements for record keeping you may want to keep records as long as you own a business.  If you want to sell your business the buyer will want to see many years of records.  

That being said, with electronic record keeping I see no reason why people should not keep their records forever.  You can buy a scanner for as little as $20 and scan all your records onto a drive.  Combo fax, scan and print machines are less than $200 and usually come with the software to store the documents electronically.  

The bottom line is that you never know when you will need a document from the past or for what.  Keeping your documents organized and for long periods of time is never a bad idea.