Yeend, Castaneda & Flynn, LLP

Once the tax return has been filed, everything is finished and there is no need to use these records again, right? Unfortunately, that perception is wrong.

The main reason to save tax records is to substantiate the information reported on the tax return.

The statute of limitations for most federal tax returns is three years.

It is helpful, and sometimes required, to save certain records even longer.

 

How long should records be kept?

Prior Year's Income Tax Returns:

Keep a minimum of three years, unless your state requires a longer period.

It is advisable to keep them longer if reported transactions might affect future years.

 

Tax Receipts:

Most audits occur within three years of the filing of the tax return.

Receipts used to document expenses should be kept through the statute of limitations applicable for that return.

After that period has expired, examine receipts to see if they fall into another area that needs to be saved for a longer period.

Non-necessary receipts that will not affect future transactions can then be discarded.

 

Business Records:

For receipts not needed under the statute of limitations, you can discard most receipts dealing with operational expenses.

Retain receipts that relate to property you still own to verify the cost for future sales.

Retain payroll records for a minimum of four years

When your business produces an overall loss on the tax return, the loss is either carried backward or forward, depending on your situation.

The tax return and records of the calculation creating the carryover, and the tax return for any year in which part of the carryover loss is absorbed, should be retained for three years following the last year the loss is used up.

 

Employee Business Expenses:

The most common employee business expenses are transportation and travel expenses.

Mileage logs, motel bills, and meal receipts should be saved for the three-year limitation period.

If you are a trucker who claims the standard meal allowance, the logbooks should be retained for three years.

 

Closing papers from the sale or purchase of a home:

Closing papers from the sale or purchase of a home should be retained for a minimum of three years after the sale of the home.

If you have previously deferred the gain from the sale of a residence, the closing papers and the tax return from the sale should be retained through the limitation period of your next home sold.

 

Building or improvements to your home:

When you build your own home, keep careful records of all expenditures, including the amounts paid to outside contractors.

The same is true for any improvements made to your home.

Keep these records for at least three years after the sale of the home.

 

Investments Records:

IRA contribution and distribution records need to be kept indefinitely.

Records of nondeductible contributions are particularly important.

 

IRA contribution and distrubution Records:

Year-end brokerage statements from the purchase of stocks, bonds, and mutual funds should be retained until three years after the investment is sold.

These statements show the reinvestment of dividends, the purchase of shares, and the redemption of shares.

 

Gifts

It is important to know the cost to the donor and obtain receipts for gifts of property other than cash. This becomes your basis in the property for future sales consequences. 

 

Inheritances

If you inherit property, you need to keep records that establish the value on the date of death.

These records usually come from the fiduciary's records and should be retained for three years after the property is sold.

 

Summary

While the most common statute of limitations is three years from the filing of the return, a return that was never filed has no statute of limitations.

The statute of limitations for returns where income has been understated by 25% or more is ten years.

Saving tax returns indefinitely may provide good historical information in addition to providing substantiation.

 

#813 — © Copyright 2003  
National Association of Tax Professionals (NATP)
720 Association Drive
P0 Box 8002
Appleton , WI 5491 2-8002
www.natptax.com