Clean Out Old Tax Records!
Are you doing your spring cleaning and wondering whether you can throw out some of those old tax records? If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why the records are kept in the first place.
Generally, we keep tax records for two basic reasons: (1) We need to keep the records in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) We need to keep track of the tax basis of our capital assets so that when we actually dispose of them, we can minimize the tax liability.
With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date when the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal period. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And, of course, the statutes don’t begin running until a return has been filed. There is no limit when a taxpayer files a false or fraudulent return in order to evade tax. If an exception does not apply to you, for federal purposes, you probably can discard most of your tax records that are more than three years old; add a year or so to that if you live in a state with a longer statute.
Examples: Sue filed her 2005 tax return before the due date of April 17, 2006. She will be able to dispose of most of her records safely after April 17, 2009. On the other hand, Don filed his 2005 return on June 2, 2006. He needs to keep his records at least until June 2, 2009. In both cases, the taxpayers may need to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.
The Big Problem! The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated, and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category:
Stock Acquisition Data: If you own stock in a corporation, keep the purchase records for at least four years after the year when the stock is sold. This data will be needed in order to prove the amount of profit (or loss) that you had on the sale.
Stock and Mutual Fund Statements: Where you reinvest dividends. Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it finally is sold. Keep statements at least four years after the final sale.
Tangible Property Purchase and Improvement Records: Keep records of home, investment, rental, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.
Individual Retirement Arrangements (IRAs): Copies of the following forms or records should be kept at least
four years beyond the year when all distributions have been made from the IRA:
Form 5498 (IRA Contribution Information)
or similar statement that is received each year that shows the contributions made, distributions received and the IRA’s
value;
Form 8606 (Nondeductible IRAs) for each year that you made a nondeductible contribution to the IRA or
received IRA distributions if you ever made a nondeductible contribution; and
Form 1099-R (Distributions) for each
year that a distribution was received from the IRA.
E Thomas Associates Inc. is a registered investment advisor in Kentucky.
Dave Smith & Tony King are Registered Representatives of and securities are offered through Dalton Strategic Investment Services, Inc., member FINRA & SIPC. 6408 River's Edge Rd, Greenville, OH 45331
.