Concerned as to the amount of time you should keep your personal income tax records? Sometimes, taxpayers need to present these documents when the government reviews or audits a filed return or is trying to levy or collect tax. Also, these documents are required by creditors, homeowners associations, other concerned parties that have requisites to determine before giving someone the right to use money or extending credit to obtain property and for any other transactions that these documents are deemed necessary.
Retain your income tax records indefinitely. The accompanying records, income documents and deduction source information that are supporting financial evidences, should be kept usually for six years. Generally, the time limit for the IRS to assess tax for a given tax year is three years after the tax return was due or filed whichever is later, except for cases of fraud or a substantial understatement of income.
The IRS goes back more than three years when they determine more than 25% of gross income is not declared on a return, they consider this a substantial understatement of income, and the period for collection can be extended to six years. Also, IRS has no time limits and they can collect tax at any time when no return has been filed for a tax year. That is why it is necessary to keep your records for circumstances like these.
Hanging on to tax returns forever and other important source documents for six years should be sufficient. No one really knows when the IRS will try to go back to previous years and try to collect tax. When tax returns are filed electronically, make sure to obtain a hard copy paper version of the return from the accountant who prepared/filed your return.
Property records need to be retained until the property is sold. The tax effects of the dealings that take place this year may be affected by the purchases in the past. These purchase documents should be held on to until the property is sold. The following are some common examples:
Home was purchased in 1976 for $50,000. Additional $15,000 was incurred for renovations in 1993 and the home is sold this year for $200,000. To calculate the gain on the transaction, the cost information needs to be available. (e.g. purchase price plus renovations). In the event the IRS questions the return, the purchase and cost documents would need to be presented to the IRS. In this example, retain the records for six years after the tax return was due or filed whichever is later.
Some taxpayers have gains that qualify for primary home sale exclusion, which allows certain homeowners to exclude up to $500,000 of gain from the sale of a home. Even if this benefit applies to you, records relating to the home purchase and improvements should still be retained. The benefit may not be available in the future and it is impossible to know how much the house will be worth in the future.
There could be …