Thursday 13 December 2012

How long to maintain tax records?




The tax season is past us, and a common question put forth by most of our clients is "How long do I need to maintain copies of my tax return and affiliated records?"
In most cases, taxpayers need to keep copies of their tax returns, and all return-related substantiating documents until the period of limitation for the returns runs out. The period of limitations is the time within which the tax return can be amended to claim credits or refunds, or for the IRS to assess additional tax liabilities.
The table below lists the period of keeping records for different scenarios

Additional tax owed
3 years
Does not report Income
6 years
Credit or refund after filing return
3 years from date of filing / 2 years from payment of tax whichever is later
Claim for loss from worthless securities or bad debt
7 years

A general suggestion is to maintain all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Keep records of all stock and fund purchases, and year-end statements on reinvested dividends and capital-gains distributions.

When claiming depreciation, amortization, or depletion deductions, keep related records for as long as the underlying property is owned. That includes deeds, titles and cost basis records.
Hang on to receipts for major home improvements for at least three years after sale of house property. They may come in handy if one wants to show potential buyers how much has been spent to upgrade the property, and certain home-improvement expenses can be used to lower any tax bill on home-sale profits.
Discard ATM receipts and bank-deposit slips as soon as they match up with the monthly statements. Pay stubs can also be similarly trashed on receipt of the W-2 for the year.
Any year that one makes a nondeductible contribution to a traditional IRA, he / she must file Form 8606 to document those contributions. Then all of those 8606 forms must be held on to until all the money from the IRA is withdrawn, so one won't end up overpaying the tax bill when retirement comes calling.
Although it is recommended that tax returns are maintained for at least six years, the taxpayer can at least have a digital archive as it can provide clues about income and investments and other tax information that might come in handy in the distant future.

The standard IRS recommendation is for paper documents to be cross-cut shredded to effect 5/16 inch-wide or smaller strips, or completely burned. In case of magnetic media, a combination of overwriting and Degaussing, followed by incinerating, shredding, pulverizing, disintegrating or grinding is usually recommended.
To save space, one can scan the records and have them stored electronically. The IRS has accepted scanned receipts since 1997. One just needs to ensure that the scanned or electronic receipts reflect the paper records accurately. The ability to index, store, preserve, retrieve, and reproduce the records must be complete.
For any queries on this article please e-mail info@gkmtax.com for our tax experts or like many of our clients, we can prepare your tax returns for you.





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