Much confusion exists over which records and documentation should be saved and for how long to support a tax return you prepare and file. Generally speaking you should save records so that if ever asked, you will be able to:
Show Income Sources
This may include your W-2, business income, copies of checks received, invoices, interest and dividend statements, social security, alimony, and K-1’s received from business interest. Documentation should be maintained such that all income and its source and type are readily available by reviewing the source document. If not readily ascertainable it would be advantageous to also save substantive collaborating information.
Keep Copies of Receipts, Expenses & Itemizations
You will want to be able to prove all items taken on your return if ever asked. For most taxpayers this would include items such as mortgage interest, real estate and personal property taxes paid, medical and dental expenses, casualty losses, moving expenses, state and other taxes, charitable contributions, alimony, employee business expenses, IRA’s, dependent care expenses, tuition, closing statements, invoices, bank statements, student interest, etc.
This is a partial list and only a sampling of the types of items you would want to save. The totality of what you would need to save would be best served by a review of the prepared return, then ensuring that you have copies of all of the deductions claimed and proof of all dependents. Proof of payment should include the payee, amount, transaction date, check, bank statement, etc. Care should be taken to maintain documentation as prescribed by IRS statues for that year’s taxes in all of the above categories and indeed all deductions on your return. A detailed understanding of what substantiates a valid tax deduction is a critical part of this process as documentation standards, based upon type, vary substantially.
Tracking Tax Basis
Frequently tax payers will know what they sold an item for such as a house or stock but will fail to properly record and track the tax basis of what they have paid for an item. For example, for home purchases you would want to have at your ready the original purchase price
plus the cost of improvements over the years. For stocks you purchase you will want to be sure to have available documentation to support the original purchase price and date.
Keeping Copies of Returns
Although there is no tax law requirement to do so, it is recommended that you always keep copies of all income tax returns that you file and all W-2’s that you receive. This will be advantageous should you ever be requested to provide a copy of a return or if a return is questioned for any reason, you will have the originals. Although you can frequently request copies of returns from the IRS, this process typically takes several months and additional administrative time and resources.
How Long Should I Save Documentation?
Generally tax law requires you to keep receipts for three years after the filing date of the return. For tax basis issues, described above, you will want to maintain records until an item is sold and then for three years after the filing date of the return when such item is sold. If you do not report income on a return that represents up to 25% of your gross income then you will need to maintain records and returns for six years. However, if there is any fraud involved in the filing of a return or a return has never been filed you should maintain books and records indefinitely.
It is always best to keep your records sorted by type and as organized as possible by year so that you will be readily able to find any needed document. Documents should be stored in a dry safe place so that documents do not deteriorate or disappear. The IRS allows you to save records electronically but you will want to be sure that these records are both readily locatable and that the records are legible and easy to read and understand.
— Gwinnett CPA, John Dillard CPA
IRS tax law and its nuances and variances are often confusing for taxpayers to read, comprehend, and correctly apply. Call us today to help ensure that you avoid all unnecessary surprises.