Last in a series of articles
As taxpayers, we are legally required to keep accurate records in case the Internal Revenue Service ever seeks justification or documentation of our tax returns. But how long should you keep these records?
No one wants or likes to keep unnecessary paper. It's a good idea to go through files at least once a year, keeping what's important and discarding unnecessary documentation. Often, the document we thought was so important last year is now useless. Documents that are not used for tax purposes, such as department store statements, can be thrown out annually.
Unfortunately, neither the IRS nor the Internal Revenue Code gives clear guidelines about which records must be kept and which can be destroyed. The IRS merely states that records should be kept "for as long as they are important for any federal tax law."
In general terms, this means that as long as the taxpayer's return is subject to audit, the taxpayer is required to keep those records.
There is a three-year statute of limitations for the IRS to assess a tax and impose a penalty. Once the three years has elapsed and the IRS is no longer permitted to examine your returns for a particular year, you can toss your records.
You should note that the three years starts when the tax return is due; if you filed early, the due date is still the target date. If you file your 2004 income tax return today, the statute of limitations will not expire until April 15, 2008. However, if you were to obtain an extension of the April 15 deadline, which is automatic if you request it, the statute of limitations would begin to run from the date you filed your return.
If you filed your return but did not pay your tax until later, the statute would run two years from the date the tax was actually paid.
However, as in many areas of the law, there are exceptions to the rule. The IRS has the right to go beyond three years if, for example, the taxpayer has substantially under-reported income. Under these circumstances, the IRS can go back six years. Furthermore, there is no statute of limitations if a taxpayer files a false or a fraudulent return. The return for that year can be audited and taxes assessed at any time.
This is the general law on recordkeeping. However, there are documents, especially in the real estate area, that you should keep longer, if not forever.
