Tax Records – How Long Should You Hold On To Them?
Doing your taxes is hardly a fun time. Once done, most people treat the process as out of out of sight, out of mind. This is fine so long as you hold on to the records you used to come up with the numbers on your return. So, just what are tax records? They consist of anything that proves a claim you made on your taxes. If you own a business and took a client to dinner, the receipt from the restaurant would constitute the tax record. If you improve your home, the receipts generated from buying the materials would constitute the proof of payment you need. If you pay someone to build a website for your business, the invoice they send you and payment receipt would constitute the tax record. So, how long do you have to hold onto these items? As is always the case with tax issues, the answer is "it depends." There is three year statute of limitations on most tax returns. If you file on April 15th, 2006, then the statute runs out on April 15th 2009. So, should you toss everything on April 16, 2009? There are exceptions to this rule, so I would probably not take that step. Exceptions? What exceptions? The first has to do with the payment of tax due. Lets assume you filed on April 15th, 2008, but havent paid everything due. 2008 was a rather rough year for most people, so this was a fairly common result. The problem is the statute does not start running till you actually pay the tax due. The good news is once you do, the statute of limitations is only two years from that date instead of three. Another major exception has to do with unreported income. If the IRS claims that you under reported your income by 25 percent or more, the statute of limitations is six years. Most prudent people use this as the time figure for holding their tax records. Does this mean everyone is a crook? Not at all. Think about it. How are you going to prove your innocence if the IRA accuses you of tax fraud? With your records! Now, there is one final large group of exceptions. There is no statute of limitations if you dont file a tax return. If you havent filed since 1990, the IRS can pretty much look at everything you file now without restriction. The same is true if you file a fraudulent tax return with the intent to evade taxes. Finally, there is also a practical situation that gives rise to much longer periods for which tax records should be held. If you own something that is going to create a capital gain, you need to keep the records from when you purchased it. The classic example is a house. The profit on a home is determined very generally by subtracting the amount you pay from the amount you eventually sell it for minus any cost of improvements. Obviously, you are going to need copies of the purchase agreement and any receipts for improvements. If youve owned your home for 15 years, youll need to have kept that purchase agreement for the full 15 and then some. Tax records are the key to defeating any audit by the IRS. The Agency will not take your word for it when it comes to expenses. As a result, it makes sense to save everything for at least six years and sometimes longer depending on your particular situation. Richard A. Chapo writes about income taxes for BusinessTaxRecovery.com.