How Long Should I Keep Tax Records?

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Question:

Irs Form 1040A

How long should I keep my tax returns?

Answer:

One of the questions I am asked most often, both as an accountant and as a tax preparer, is how long should you hold on to records and files, receipts and bills, and the like.

First of all, it is my trust that you should keep the paper copy of your tax returns (Form 1040 or 1040A plus all supporting Schedules and Forms) forever! This provides a permanent description of your financial history. You never know when the facts on a prior year's tax return will come in handy for a variety of tax or financial related reasons, or just to satisfy personal curiosity.

The time period for holding all other records ties in to the fact that the Irs, and the proper state tax authorities, has three (3) years from the due date (or filing date if you had any extensions) of a tax return to audit that return (except in the case of tax fraud - then the Irs can go back forever). If you filed your 2002 Form 1040 by the introductory April 15, 2003 due date, "Uncle Sam" has until April 17, 2006 to audit it and ask for additional taxes.

I suggest holding all back-up documentation that supports an item reported or deducted on your tax return for four (4) full years. This includes all applicable bank statements and cancelled checks as well as W-2s, 1099s, 1098s, and proper receipts and bills. You can toss all such facts for your 2002 tax return in December of 2006.

Hold on to your private pay stubs for the year until you have received the Form W-2 for that year. Reconcile the year-to-date cumulative totals on the last pay stub for the year to the amounts reported on the W-2. If they match you can throw out all but the last pay stub. Keep the final pay stub for the year, with year-end cumulative numbers, with your tax return documentation for that year.

Certain documentation requires longer holding periods. For investments in stock, bonds and mutual funds you should keep all confirms and other proper back-up, such as notices of splits and records of any dividend reinvestments, for as long as you hold the investment plus four (4) additional years. You should keep the confirmation slip or other documentation for the sale or habit of the investment for four (4) years after the sale or disposition.

Similarly, if you own real estate you should keep all end or settlement Statements for the buy and refinancing of the property, and documentation of any capital improvements, for as long as you own the property plus four (4) additional years. You should keep the end or settlement Statement or other documentation for the sale or habit of the property for four (4) years after the sale or disposition.

If you have invested in a slight partnership or "sub-chapter S" corporation, or are a partner in a enterprise organized as a partnership, a "sub-chapter S" corporation or an Llc or Llp, you should keep the each year Form K-1 you receive from the investment or enterprise for as long as you own an interest in the entity plus four (4) additional years, and keep any paperwork related to the sale or habit of your interest for four (4) years after the sale or disposition.

Receipts and bills for personal expenses that are not related to any items reported or deducted on your tax return can commonly be tossed after one year. Throw out all such bills for calendar year 2004 in January of 2006. You may want to keep bills, receipts and cancelled checks for equipment, applicance and the like for at least as long as these items are covered under warranty.

Do you have a demand you would like to Ask The Tax Pro? Go to http://rdftaxpro.tripod.com/taxhelp.

How Long Should I Keep Tax Records?