Are you looking for guidance on how long you should retain your personal income tax records? These records may have to be produced if IRS (or a state or local taxing authority) was to audit your return or seek to assess or collect a tax. In addition, lenders, co-op boards, or other private parties may require that you produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you.
Keep returns indefinitely and the supporting records usually for six years. In general, except in cases of fraud or substantial understatements of income, IRS can only assess tax for a year within three years after the return for that year was filed (or, if later, three years after the return was due). For example, if your 2015 individual income tax return is filed by its original due date of April 18, 2016, IRS will have until April 18, 2019 to assess a tax deficiency against you. If you file your return late, IRS generally will have three years from the date you filed the return to assess a deficiency.
However, the three-year rule isn’t ironclad. The assessment period is extended to six years if more than 25% of gross income is omitted from a return. In addition, where no return was filed for a tax year, IRS can assess tax at any time (even beyond three or six years). If IRS claims that you never filed a return for a particular year, keeping a copy of the return will help you to prove that you did.
While it’s impossible to be completely sure that IRS won’t at some point seek to assess tax, retaining tax returns indefinitely and important records for six years after the return is filed should, as a practical matter, be adequate. If you file a return electronically, the company that prepared and/or filed your return is required to provide you with a paper copy of the return. Be sure to get and retain that copy.
Records relating to property may have to be kept longer. The tax consequences of a transaction that occurs this year, such as a sale of property, may depend on events that happened years ago. The period for which you should retain records must be measured from the year in which the tax consequences actually occur.
For example, suppose you bought your home in 1986 for $100,000, made $20,000 of capital improvements in 1993, and sell it this year. To determine the tax consequences of the sale, you must know your basis (i.e., original cost plus later capital improvements). If your return for the year of sale is audited, you may have to produce records relating to the purchase in 1986 and the capital improvement in 1993 to be able to show what your basis is. Therefore, those records should be kept for at least six years after your return is filed.
You should retain all records relating to home purchases and improvements even if you expect your gain to be covered by the home sale exclusion, which can be as much as $500,000 for joint return filers. There’s no telling how much the home will be worth when it’s sold, and there’s no guarantee that the home-sale exclusion will still be available when the future sale takes place.
In case of separation or divorce. If separation or divorce becomes a possibility, be sure you make a copy of any tax records affecting you that are kept by your spouse. Copies of all joint returns filed and supporting records are important since both spouses are liable for tax on a joint return, and a deficiency may be asserted against either spouse.
Loss or destruction of records. To safeguard your records against loss from theft, fire or other disaster, you should consider keeping your most important records in a safe deposit box or other safe place outside your home. In addition, consider keeping copies of the most important records in a single, easily accessible location so that you can grab them if you have to leave your home in an emergency.
If you have any questions or wish to discuss this matter further, feel free to give me a call, or talk to me during our Shred Fest event March 12. Please watch for our flyer for the details of our Shred Fest event.