Are you concerned about the length of time you must keep your personal income tax records? Sometimes taxpayers are required to submit these documents when the government reviews or audits a filed return or is trying to levy or collect taxes. In addition, these documents are required by creditors, homeowners associations, other interested parties who have requirements to determine before granting someone the right to use money or extend credit to obtain a property and for any other transaction that these documents deem necessary.
Keep your income tax records indefinitely. The accompanying records, income documents, and deduction source information that support financial evidence generally must be retained for six years. In general, the time limit for the IRS to assess taxes for a given tax year is three years after the tax return is due or filed, whichever is later, except in cases of fraud or understatement. substantial income.
The IRS goes back more than three years when it determines that more than 25% of gross income is unreported on a return, considers it a substantial understatement of income, and the collection period can be extended to six years. Also, the IRS has no time limits and can collect taxes at any time when no return has been filed for a tax year. That is why it is necessary to keep your records for circumstances like these.
Holding onto forever tax returns and other important source documents for six years should be enough. No one really knows when the IRS will try to roll back years and try to collect taxes. When tax returns are filed electronically, be sure to obtain a paper copy of the return from the accountant who prepared/filed your return.
Property records must be retained until the property is sold. The tax effects of operations carried out this year may be affected by purchases made in the past. These purchase documents must be retained until the property is sold. The following are some common examples:
The house was purchased in 1976 for $50,000. An additional $15,000 was incurred for renovations in 1993, and the house sold this year for $200,000. To calculate the profit on the transaction, cost information must be available. (for example, purchase price plus renewals). In the event the IRS disputes the return, the purchase and cost documents must be submitted to the IRS. In this example, keep the records for six years after the tax return is due or filed, whichever is later.
Some taxpayers have gains that qualify for the main home sale exclusion, which allows certain homeowners to exclude up to $500,000 of gain from the sale of a home. Even if this benefit applies to you, records related to the purchase and improvements to the home must still be retained. The benefit may not be available in the future and it is impossible to know how much the home will be worth in the future.
There may be cases where the new property assumes the cost of the old property. In this case, the records of the old property must be kept for up to six years after the sale of the new property. Let’s say you purchased a commercial car in 2010 and are now trading in for a new commercial vehicle in 2015. When the new commercial vehicle is sold, any gain or loss is based in part on the commercial vehicle’s purchase records. . Therefore, records must be retained for six years after the due or filing date of the tax return, whichever is later.
Longer record retention periods also apply to ownership stock investments in a small business, mutual funds, stocks, etc. In the cases of these typical investments, when dividends are reinvested, each dividend reinvestment is a purchase. Therefore, beginning with the year the investment is sold, records must be retained for six years after the tax return is due or filed, whichever is later.
For damaged and stolen property, the calculation of the deduction for casualty and theft loss is determined, in part, by the cost of the damaged or stolen property. Having the records to support the cost of these properties is important to backing up your foundation. Therefore, beginning with the year of loss, records must be retained for six years after the tax return is due or filed, whichever is later.
For married people where separation or divorce becomes a possibility, You must ensure that you have access to any tax documents related to you that are in the possession of your spouse. Better yet, make copies of these tax documents as access to these documents may be difficult later. Both spouses are responsible for joint returns.
Storing records electronically – This can also be practical and easier. The period necessary to keep the electronic versions is the same as for the paper versions. Always back up your electronic tax records.
Damage or loss of records – Consider keeping your most important documents in a safe deposit box. Also consider keeping important records in a convenient central location.
Sometimes records that are lost or damaged can be reconstructed. For example, the CPA firm can provide copies of these damaged documents, as they are required by law to retain copies of tax returns for a period of three years. We recommend keeping copies of the statements and source documents electronically.
Also, records are kept by other people/businesses who have helped you with the purchase or sale of property. For example, he bought mutual funds from a mutual fund company; The company can help rebuild the costs of mutual funds.
It is still the safest course of action to keep copies of documents in the safest place possible, however, since you can never be sure whether third parties have actually kept records of the documents you need. This article is an example for illustrative purposes only and is intended as a general resource, not a recommendation. We hope this article has been useful.