The question is always raised: how long must I keep my records? No one wants or likes to keep unnecessary papers, but you don’t want to be caught without them when they are needed. As taxpayers, we are legally required to keep accurate books and records in the event the Internal Revenue Service ever knocks on our door seeking justification or documentation of our tax returns.
Unfortunately, neither the Internal Revenue Service nor the Internal Revenue Code gives us any clear guidelines as to what records must be kept and what can be destroyed. The IRS merely states that records should be kept “for as long as they are important (or material) for any Federal tax law.” In general terms, this means that while the taxpayer’s return is subject to audit by the Internal Revenue Service, the taxpayer is required to keep his or her books and records.
Taxpayers should go through their files at least once a year, keeping what you think is important, but discarding a lot of unnecessary documentation. Often, the document we knew was so important last year is now considered totally useless. Clearly, those documents which are not used for tax purposes can be thrown out on a yearly basis – such as department store statements.
There is a three year statute of limitations for the IRS to assess a tax and impose a penalty on the taxpayer. Once this three year period has elapsed and the IRS is no longer permitted to examine your returns for a particular year, you can toss out your records. You should note that the three years begins when the tax return is due; if you filed early, the due date is still the target date. Keep in mind, however, that if you obtained an extension of the April 15 deadline, the statute of limitations begins to run from the date you filed your return. If you filed your return but did not pay your tax until a later date, the statute does not run until two years from the date the tax was actually paid.
However, as in many areas of the law, there are exceptions to the rule. The IRS has the right to go beyond three years if, for example, income has been substantially under-reported by the taxpayer. Under these circumstances, the IRS can go back six years. Furthermore, there is no statute of limitations where a taxpayer files a false or a fraudulent return, or does not file any return at all. The tax for those years can be audited, and assessed at any time.
That is the general law on record keeping. There are documents, especially in the real estate area, which you should keep your records forever. When you buy real estate, whether it be your principal residence or an investment property, clearly you have to keep your records for at least four years from the date you sell that property. Profit and loss can only be determined once you sell your property, and in order to determine whether you have made any gain, you have to subtract the purchase price from the selling price.
Under the Taxpayer Relief Act of 1997, taxpayers can exempt the first $250,000 of profit ($500,000 for married taxpayers filing a joint return). The only way that you can determine the amount of your profit is to determine the basis (adjusted purchase price) when your principal residence is ultimately sold. This means that you may have to go back to the day when your very first property was purchased, to determine all of the legitimate items that can be added to basis.
Also, it is important that you keep careful and accurate records of all of your improvements. For every dollar you can demonstrate was spent for home improvements, you will ultimately save 20 cents that does not have to go to Uncle Sam. And that is only at the Federal level; you also have to consider any local or State tax. However, the taxpayer has the burden to prove that he/she actually made the improvement and paid $50,000. It is not sufficient merely to tell the IRS auditor that you think you put $50,000 worth of improvements in the house sometime in the late 1990’s.
For more details on what information to keep and how it relates to taxes and savings, call Helen today at 847.967.0022 or email firstname.lastname@example.org.