After filing your 2022 tax return, you may want to get rid of clutter, but are not sure which documents to retain and which documents are safe to throw away. In case you are audited by the IRS, there are certain documents that will need to be produced.
Luckily, except in cases of fraud or substantial understatement of income, the IRS can only assess taxes within three years after the return for the year it was filed, or three years after the return was due. For example, if you filed your 2019 tax return by its original due date of April 15, 2020, the IRS has until April 15, 2023, to assess a tax deficiency against you. If you file late, the IRS generally has three years from the date you filed. However, the tax assessment period is extended to six years if more than 25% of gross income is omitted from a return. If no return is filed, the IRS can assess tax any time. Therefore, all tax returns filed should be kept indefinitely. All supporting documentation can be discarded after the statute of limitations discussed above has expired.
Property-related records
The tax consequences of a transaction that occurs this year may depend on events that happened years ago. For example, suppose you bought your home in 2007, made capital improvements in 2014 and sold it this year. To determine the tax consequences of the sale, you must know your basis in the home — your original cost, plus later capital improvements. If you’re audited, you may have to produce records related to the purchase in 2007 and the capital improvements in 2014 to prove what your basis is. Therefore, those records should be kept until at least six years after filing your return for the year of sale.
Retain all records related to home purchases and improvements even if you expect your gain to be covered by the home-sale exclusion, which can be up to $500,000 for joint return filers. You’ll still need to prove the amount of your basis if the IRS inquires. Plus, there’s no telling what the home will be worth when it’s sold, and there’s no guarantee the home-sale exclusion will still be available in the future.
Other considerations apply to property that’s likely to be bought and sold — for example, stock or shares in a mutual fund. Remember that if you reinvest dividends to buy additional shares, each reinvestment is a separate purchase.
Marital breakup
If you separate or divorce, be sure you have access to tax records affecting you that are kept by your spouse. Or better yet, make copies of the records since access to them may be difficult. Copies of all joint returns filed and supporting records are important, since both spouses are liable for tax on a joint return and a deficiency may be asserted against either spouse. Other important records include agreements or decrees over custody of children and any agreement about who is entitled to claim them as dependents.
Loss or destruction of records
To safeguard records against theft, fire, or other disaster, consider keeping important papers in a safe deposit box or other safe place outside your home. In addition, consider keeping copies in a single, easily accessible location so that you can grab them if you must leave your home in an emergency.
Need assistance?
If you have questions or would like an appointment to discuss record retention and IRS audits, please contact your Rudler, PSC advisor at 859-331-1717.
RUDLER, PSC CPAs and Business Advisors
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