When Do You Toss Records?


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Substantiation

When Do You Toss Records?

By: A.J. Cook

How long before you can throw away old tax records?

Usually, with major exceptions, it's six years.

Six years may seem a bit long. After all, the Internal Revenue Service has only three years to audit your return. Wrong. Sometimes it can go back six years, so play it safe. And you start counting from the return's due date or date filed, whichever is later.

No time machine can wrest you away from the tax collector if you filed a fraudulent return. Fraud is more than inflating the cost of a business lunch by $2 -- that could be negligence. Indications of fraud include altering documents, claiming nonexistent dependents, keeping two sets of books, failing to report large sums of cash.

THE PLANNING TIP: Retain tax records for as long as necessary. Otherwise you might lose deductions if the IRS audits your return.

Assume you aren't the deceitful type, only an ordinary taxpayer with dwindling attic space.

Retain these records six years:

Proof of each amount of income and deduction on your return. This includes IRS forms W-2 (wage and tax withholding statements) and 1099 (reports of interest, dividends, distributions), canceled checks, receipts, mileage logs, expense reports, appointment books, alimony and child support agreements, police reports of theft, charge card vouchers.
Proof of contributions to and withdrawals from individual retirement accounts and retirement plans. The six years starts with the return reporting your final distribution.
Proof of basis should be kept until six years after the asset is sold. Proof of basis requires these records:
For stock -- brokers' reports and records of stock dividends, stock splits.
For assets given to you -- a record of donor's basis. This is usually your basis.
For assets inherited -- inheritance and estate tax returns showing the values reported. Your basis comes from these returns. If these are not available, preserve some other proof showing date of death value.
For your home -- a record of the purchase price, closing statement and cost of improvements. This includes landscaping, new roof, new kitchen, added spare room. As you defer the gain from one home sale, by purchasing a more expensive one, keep the records, including the sales price, from both homes. For mobile families, this means saving records from three, four or more.

Retain these records indefinitely:

Copies of all tax returns with supporting schedules. These could be helpful if the IRS loses your return (yes, occasionally it misplaces a thing or two).
Papers supporting large bank deposits or major purchases made from funds not reported on your tax return. This includes money borrowed and gifts or loans received. You don't want the IRS to think the $5,000 loan repaid by your brother was income.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.
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