Before summer vacations is a great time to clean out that
growing pile of tax and financial papers that fills your
home and office. Here's what you need to hold, and what you
can throw out without fearing the wrath of the IRS.
Anyway, you 'know' that as soon as the garbage man pulls
away from your curb, the IRS will want exactly those
documents you threw out. Let's look at what are the rules?
What information do you have to hold on to and for how long?
Let's start with your "zone of security", the IRS statute
of limitations. This limits the number of years for which
the IRS can audit your tax returns. Once that period has
expired, the IRS is legally stopped from even asking you
questions about those returns.
The idea behind this is, after a period of years, records
are lost or misplaced, and memory is not as accurate as it
used to be. There's a need for closing things out. Once the
statute of limitations for a specific year has expired, the
IRS can't go after you for additional taxes. However, you
can't go after the IRS for additional refunds, either.
"Three-Year" Rule
In assessing additional taxes, the statute of limitation
runs three years from the date you file your return. If
you're looking for an added refund, the limitation period
is generally the later of three years from the date you
filed the original return or two years from the date you
paid the taxes. There are exceptions:
- If you do not report all your income and the unreported
amount is more than 25% of the gross income that shows on
your return, the limitation period is six years. - If
you've claimed losses from a worthless securities, the
limitation period is extended to seven years.
- If you file a 'fraudulent' return, or don't file at all,
the limitations period never begins to run. The IRS can, in
fact, get you at any time.
- If you're deciding what records you need or desire to
keep, you have to ask what are your chances of an audit. An
audit is an IRS verification of items of income and
deductions on your return. You must keep records to
support those items until the statute of limitations is
over.
If you've filed on time and paid what you should, the
requirement is to keep your tax records only three years.
But some records have to be kept longer than that.
Remember, the "three-year" rule concerns the information on
your tax return. Pay attention, some of that information
may relate to transactions greater than three years old.
Here's Checklist Of The Documents You Should Hold Onto.
1. Capital gains and losses. Your gains are reduced by your
basis -- your cost (including all commissions) plus, with a
mutual fund, any reinvested dividends and capital gains.
However, you may have bought that stock five years ago, and
you've been reinvesting those dividends and capital gains
over the last ten years. Also, don't forget those stocks
splits. So, you don't ever want to throw these records out
until after you sell the securities. Furthermore, then if
you're audited, you have to prove those numbers. So, you'll
need to keep those records for at least three years after
you file the return reporting their sales.
2. Expenses on your home. Cost records for your house and
improvements must be kept until the home is sold. It's just
good to do, even though most homeowners won't have any tax
problems. That's because profit of less than $250,000 on
your home ($500,000 on a joint return) isn't subordinate to
taxes under the 1997 tax legislation enactment. If the
profit is more than $250,000 ($500,000 on a joint return),
or if you don't qualify for the full gain exclusion, then
you're going to need those records for another three years
after that return is filed. Most homeowners won't face that
issue thanks to the 1997 tax law, but better safer than
sorry.
3. Business records. I must warn you: Business records can
be a nightmare. Non-residential real estate is now
depreciated over 39 years. You could be audited on the
depreciation up to three years after you file the return
for the 39th year. That's a long time to hold on to
receipts. However, you may need to show proof of those
numbers.
4. Employment, bank and brokerage statements. Keep your
W-2s, 1099s, brokerage and bank statements to prove income
until three years after filing or longer. Don't even think
about throwing out checks, receipts, mileage logs, tax
diaries and other documentations that confirm your expenses.
5. Tax returns. Keep copies of your tax returns as well.
You can't rely on the IRS to actually have a copy of your
old returns. I recommend my clients keep tax records for 6
years. The bottom line is that you've got to keep those
records until they can no longer affect your tax return,
plus the three-year statute. But that's just for tax
purposes.
6. Social Security Records. You will need to keep some
records for Social Security. Please check with the Social
Security Administration each year to confirm that your
payments have been appropriately credited. If they are
wrong, you will need your W-2 or copies of your Schedule C
(if self employed) to prove the right amount. Don't throw
out those records until after you've prove out those
contributions.
You can confirm your payments and estimate your future
benefits by filing Form SSA-7004 with the Social Security
Administration. You can download the form, or apply online.
While it may bring you some personal satisfaction to review
your financial records from poverty to wealth. It is still
probably time to clean out your growing storage.
----------------------------------------------------
Ken Morrow
Bookkeeping USA
Email: km@bookkeepingusa.com
Web: http://www.bookkeepingusa.com
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