How long to keep financial records

By: Julian Block Tax Planning 1 Follower


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You need no reminder to hold on to your tax records in case your returns are questioned by the Internal Revenue Service. But just how long do you need to save those old records that clutter up your closets and desk drawers? Unfortunately, there is no flat cutoff and the time limits go all over the lot. The IRS says the answer depends on what information the records contain and the kind of transaction involved.

It supplements this vague guideline with a cryptic warning: Keep supporting records for "as long as they are important for the federal tax law." Translated from government argot, this means save credit card and other receipts, bills, invoices, mileage logs, canceled, imaged or substitute checks, and whatever else might help support income, deductions, exemptions, credits, exclusions, deferrals and other items on your returns.
 
Hang on to those documents at least until the expiration of the statute of limitations for an audit or for you to file a refund claim, should you find an error after filing. The statute of limitations is the limited period of time after which the tax gatherers are no longer able to come knocking and you cannot recover an overpayment.
 
In most cases, the IRS has only three years from the filing deadline to take a crack at your Form 1040. For example, the deadline is April of 2010 for the government to start an examination of a return for calendar year 2006, with a filing due date, for most persons, of April of 2007. As soon as three years elapse, you could toss or — if apprehensive — shred much of the paperwork that you have accumulated.
 
But wait! Predictably enough, nothing is absolutely straightforward when it comes to taxes. There are two exceptions to the three-year test, though they do not apply to most people. The first one authorizes the IRS to double the audit deadline from three to six years if the amount of income you fail to report is more than 25 percent of the amount you show on your return. To illustrate, the six-year deadline expires in April 2008 for returns for calendar year 2001 that were submitted in 2002. The other exception specifies that there is no time limit on when the IRS can come after you if you fail to file a return or file one that is deemed false or fraudulent. The audit, admonishes the IRS, can begin "at any time."
 
Those exceptions aside, there are other situations in which it is advisable to keep tax-related documents until they can no longer affect future returns, which can prove to be far longer than three years. The possibilities include records that show what you paid for stocks, mutual funds, real estate and other investments. Those records are vital, not only because you may need them for an IRS audit, but because you need them to figure your profits or losses on sales that may not take place until many years later.
 
You also should retain indefinitely copies of 1040 forms filed electronically (print out paper copies and back up the files on compact discs) or mailed in. Copies are always helpful as guides for future returns or amending previously filed ones and may prove helpful in case the IRS claims you failed to file returns.
 
Julian Block, an attorney in Larchmont, NY, has been cited as a "leading tax professional" (New York Times) and "an accomplished writer on taxes" (Wall Street Journal). He is a member of the New York Financial Writers Association and the American Society of Journalists and Authors and wrote the chapter on "Taxes and Deductions" for "The ASJA Guide to Freelance Writing." This article is excerpted from "Tax Tips For Small Businesses: Savvy Ways For Writers, Photographers, Artists And Other Freelancers To Trim Taxes To The Legal Minimum." It explains strategies to reduce taxes for this year and even gain a head start for future years. For more of his articles and to order his books, visit www.julianblocktaxexpert.com.
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