How long should I save my tax records after tax season?

I get this question all the time.  My answer simply is this. It depends.

People generally save their tax records because they are afraid of being audited.

Another reason people save their records is with regards to maintaining their records of their capital assets such as investments in stocks and mutual funds or depreciating assets like residential rental homes or commercial properties.  Also included in that would be improvements made to those types of properties.

Statute of Limitations:

Federal returns can be amended for the prior three years, however state and local taxes can be amended for the prior four years.  That is also the same amount of time that additional taxes can be assessed the taxpayer by the IRS and state and local agencies.  The exception to that is the IRS can extend the assessment period up to six years should they discover if more than 25% of a taxpayer’s income has been omitted from the tax return.  However the statute of limitations does not apply to the filing of false and fraudulent tax returns made in an effort to evade paying taxes.  Also there is no statute of limitations on a return that was never filed.

So what should you do:

Generally people are looking for that comfort zone with regards to saving their records.  So I suggest to them to save them for seven years.  This gives the taxpayer some peace of mind.  However that scenario changes when we delve deeper into the discussion of income producing investments and the sale thereof.

Income producing investments such as stocks and mutual funds.

The records for purchasing stocks and mutual funds, as well as those records where the taxpayer earns dividends that are reinvested to buy more of the same should be saved. These records prove the taxpayer’s basis and thus reduce gain or demonstrate the loss in the year of sale.  These records should be saved for at least four years following the sale.

That time frame can be extended indefinitely should capital losses exceed $3,000 in a given year.  Capital losses that exceed $3,000 can be carry forward to future returns.  Should the IRS audit a return with a capital loss carryover they can ask to see the original records of the purchases.  Thus you should save those records until four years after the carryover losses are exhausted.

Income producing investments such as residential and nonresidential rental properties.

I have always suggested to my clients that anytime you purchase and place into service any rental properties that that first years tax return be saved indefinitely.

The same goes for any capital improvements made to such properties, such as a new roof, siding, windows, sidewalks, driveways etc.  One of the first reasons to save

these records occurs should you decide to have someone new prepare your tax returns.  Not all tax preparers include depreciation worksheets in your file package.

Should you make that change you may need the original return to let that new preparer know when the asset was placed in service, what your basis in the property is, any improvements made to that property etc.

You will want to save these records until at least four years after the sale or disposition of such properties as well.

The same can be said for any depreciable asset used in a trade or business.

Should you have a storage problem in trying to save your returns you might consider digitizing them as an option. No matter what method you decide to use you must make sure that they are safe and secure.  Misplaced or lost tax returns are one of the leading sources of identity theft.  You must remember that these documents contain your personal and banking information.


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