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Retension of Tax Records
How long you
should retain your personal income tax records. These records may
have to be produced if IRS were to audit your return. 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 you filed your
1996 individual income tax return by its original due date of
April 15, 1997, IRS would have until April 15, 2000 to assess
a tax deficiency against you. If you filed your return late, IRS
generally would have three years from the date you filed the return
to assess a deficiency.
Records relating
to property may have to be kept longer. Keep in mind that the
tax consequences of a transaction that occurs in one year may
depend on things that happened in earlier years-and that the period
for which you should retain records must be measured from the
year in which the tax consequences actually occur. This may be
significant, for example, where you sell property that you bought
years earlier.
For example,
suppose you bought your home in 1980 for $100,000 and made an
additional $20,000 of capital improvements in 1988. To determine
the tax consequences of the sale, it's necessary to know your
basis (i.e., original cost plus later capital improvements). For
example, if you sell your home in 1998, and your return for that
year is audited, you may have to produce records relating to the
purchase in 1980 and the capital improvement in 1988 to be able
to show what your basis is. Therefore, those records should be
kept for at least six years after your 1998 return has been filed
instead of just six years after the transactions they relate to
occurred. (Even though as much as $250,000 sale of home gain can
now escape tax (up to $500,000 for joint return filers), you should
still retain all records relating to home purchases and improvements.
There's no telling how much the home will be worth when it's sold,
and there's no guarantee that the sale of home exclusion will
still be available when the future sale takes place.)
When new
property takes the basis of old property, records relating to
the old property should be kept until six years after the sale
of the new property is reported.
Similar considerations
apply to stock in a business corporation or in a mutual fund,
bonds (or other debt securities), etc. In particular, remember
that if you reinvest dividends to purchase additional shares of
stock, each reinvestment is a separate purchase of stock, and
the records of each reinvestment should be kept for at least six
years after the return is filed for the year in which the stock
is sold.
Because the
calculation of the casualty and theft loss deduction is determined
in part by your basis in the damaged or stolen property, you'll
need to have records to support that basis, until six years after
you file the return claiming the loss deduction.
If separation
or divorce becomes a possibility, be sure you have access to any
tax records affecting you that are kept by your spouse. Or better
still, make copies of the tax records, since in such situations,
relations may become strained and access to the records difficult.
Your records
should include a copy of the divorce decree or agreement of separate
maintenance, which may be needed to substantiate alimony payments
and distinguish them from child support or a property settlement.
Copies of all joint returns filed and supporting records are important,
since the liability for tax on a joint return is joint and several
and a deficiency may be asserted against either spouse. Your records
should also include agreements or decrees over custody of children
and any agreements as to who is entitled to claim an exemption
for them. Retain records of the cost of all jointly-owned property.
Also, get records as to the cost or other basis of all property
your spouse or former spouse transferred to you during your marriage
or as a result of the divorce, because your basis in that property
is the same as your spouse's or former spouse's basis in it was.
C.
David Pitzer, CPA, PC
118
Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711
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