Tax Records
Many taxpayers are confused about IRS tax record requirements. It is vitally important to have such tax records if the IRS audits your return or suggests you owe more tax than you paid.
It is strongly suggested that you keep copies of all of your returns indefinitely and supporting tax records for six years from the date the applicable returns were actually filed. In general the IRS can only audit you within three years of the date the return in question was filed. For example, if you filed your 2009 tax return on April 15, 2010, the IRS would face a deadline of April 15, 2013 to audit you or claim additional tax due. It is important to note that the functional date is when you actually filed the return in question, particularly if you were late or filed extensions. As is always true with taxes, there are exceptions to this rule.
You may run into problems if your tax return looks like the great American novel. Failure to report more than 25% of gross income on your return gives the IRS an additional three years to pursue you. Using the example in the previous paragraph, the IRS would have until April 15, 2016 to audit your 20009 tax return.
Perhaps the most frightening scenario is one where you fail to file a return for a particular year. Since the three-year period runs from the date of the filing of the applicable return, the IRS could audit you whenever it gets around to it. If you failed to file a return in 1980, the IRS could audit that tax year today. This potential nightmare comes about because the three-year audit period does not start until you actually file a return. No tax return filing? No time limit for the IRS.
The IRS has been known to lose or misplace tax returns. While conspiracy advocates argue that this is evidence of a nefarious scheme, the simple fact is that the IRS receives millions of returns and inevitably loses things. So how do you protect yourself? You keep copies of every single tax return you have filed.
Finally, be careful when filing your returns electronically. Make sure you get copies from the company that prepared and/or filed your return. All such entities are required to provide you with paper copies of your returns.
If you hold property for an extended period of time, you absolutely must keep records relating to the property for a much longer period. This is particularly true if you own real estate.
If you purchased a home in San Diego in 1980 for $100,000 and made an additional $50,000 of capital improvements over the years, you must keep records of all such activity for the inevitable day when you sell the property. You will need to be able to determine the tax consequences of the sale, to wit, your basis (original cost plus later capital improvements) and provide evidence of the same if you are ever audited.
Now you may be thinking that such records are unnecessary because you can escape tax on up to $500,000 of the gain. There are two problems with this assumption. First, the tax code may change between now and the year you sell the property. Second, the value of the property may increase to such a point that the gain is more than $500,000. Avoid the problem by keeping all records for a period of no less than seven years after the property is sold.
If you fall into the unfortunate 50% of marriages that fail, make sure you keep copies of all records. This includes a copy of all agreements and court orders related to the divorce. Can you imagine asking a disgruntled ex-spouse for a copy of your tax records when you are facing an audit? Get the records now and avoid doubling your misery!