So we all know someone who is a pack rat. They have their first grade spelling test, newspapers from 15 years ago, and they have their last 15 years of tax returns. While you don’t need 15 years worth, having the last three years of tax returns can really help, should the IRS audit your income taxes. Based on Publication 552 the IRS suggests that keeping records will help:
· Identify sources of Income
· Track expenses
· Track basis in property
· Support items claimed on tax returns
Copies of tax returns and these records will help if you need to speak with the IRS about a tax audit, want to amend a return, or pass away and turn your estate over to a survivor or executor.
What to Keep
In addition to the tax return itself, in case of an IRS audit, keep these types of records with the returns:
· Income records- W2s, 1099s, bank statements, brokerage statements, and K-1s
· Expenses- sales slips, invoices, receipts, cancelled checks, written communications from charities
· Home- closing statements, purchase & sale agreements, proof of payment, insurance records, and receipts from home improvement costs
· Investments- brokerage statements, mutual fund statements, 1099s, 2439s
You may also want to keep records that support:
· Alimony payments
· Business use of your home
· Casualty and Theft loss
· Child Care Expense
· Contributions to Charities
· Credits for the Elderly and Disabled
· Education Expense for you and your dependents
· Exemptions- how the person relates to you that is on your return
· Employee business expense
· Gambling loss and winnings
· Health Savings Accounts
· Medical and Dental
· Mortgage Interest
· Moving Expense
· Pensions and Annuities
· Taxes paid
· Tips received
How long should you keep files for potential IRS audits?
The IRS can go back three years for a tax audit, if you owe additional tax. But, if you fail to report income that is 25% or more of your gross income, then the IRS can go back 6 years. For fraud and failure to file, the IRS has no statute of limitations for how far back they may reach. If you amend a tax return, then IRS has the later of three years or two years after the tax was paid. And if you file a return with a claim for a loss from worthless securities, then the IRS can go back seven years.
Who knew that ‘pack ratting’ could make an IRS audit simpler? Well, that is if the pack rat can find the records when needed!
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.