How Safe Are Your Tax Records?

PROTECT YOUR RECORDS … FOR PEACE OF MIND

If you are using electronic records – stored remotely and retrievable – great!  But what about those who still keep paper records in a home-office, garage, basement, or attic?  Well, if you are going to keep your tax records in  your home, make sure they won’t be destroyed in an unexpected catastrophe like a fire or flood.  While the IRS isn’t heartless … if they come looking for your records, you will wish you have kept them safer.

According to The Bradford Tax Institute February Tax Letter, “Reg. Section 1.274.5T(c)(5) addresses your loss of tax records due to circumstances beyond your control.  The regulation states:

Where the taxpayer establishes that the failure to produce adequate records is due to the loss of such records through circumstances beyond the taxpayer’s control, such as destruction by fire, flood, earthquake, or other casualty, the taxpayer shall have a right to substantiate a deduction by reasonable reconstruction of his expenditures or use.”

Sounds good, right?  Not so much.   It takes time.  You don’t know how long it will take or who you will get to testify on your behalf.  It is unlikely that you will be able to recover on all of your original deductions, and even after reconstruction, the courts do not historically make the taxpayer *whole*.

In fact, if the courts think you are at fault for not having your tax records – either because you were careless in caring for them or that you didn’t make a “good-faith” effort at reconstruction – you could face penalties on top of the taxes an interest.

The bottom line is is you are going to keep paper records – invest in a storage device that is fireproof and waterproof.  Also, if you are going to hold on to those paper receipts – make a photocopy of them because they will fade and will be useless.

Larger IRSSo how long should you keep records?

According to the IRS, the length of time you should keep a document depends on the action, expense, or event the document records. Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out.

The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax. The below information contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

  1. You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
  2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
  3. You file a fraudulent return; keep records indefinitely.
  4. You do not file a return; keep records indefinitely.
  5. You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
  6. You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
  7. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to assets?

Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition.  You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.

What should I do with my records for nontax purposes?

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes.  For example, your insurance company or creditors may require you to keep them longer than the IRS does.

Source: Bradford Tax Institute