Tossing Old Tax Records? Read This First!

Old Tax Records, Tossing Old Tax Records, Old Records, Files
Now that your taxes have been completed for 2014, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have old records from years ago that you are afraid to throw away. It would be helpful to understand why the records must be kept in the first place.

Why Do We Keep Old Tax Returns?

Generally, we keep old tax records for two basic reasons:

  1. In case the IRS or a state agency decides to question the information reported on our tax returns.
  2. To keep track of the tax basis of our capital assets so that the tax liability can be minimized when we dispose of them.

How Long Before We Can Toss Our Old Tax Records?

With certain exceptions, the statute for assessing additional taxes is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal law. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years. This is if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And, of course, the statutes do not begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return to evade taxes.

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded. Again, take note that you should add a year or so to that if you live in a state with a longer statute.

Examples – Sue filed her 2011 tax return before the due date of April 15, 2012. She will be able to dispose of most of the 2011 records safely after April 15, 2015. On the other hand, Don files his 2011 return on June 2, 2012. He needs to keep his records at least until June 2, 2015. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years.

Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The Big Problem!

So what’s the problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired? The problem is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. These need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Therefore, it makes more sense to keep those records separated by asset.

The following are examples of records that fall into that category:

  • Stock acquisition data – If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit or loss you had on the sale.
  • Stock and mutual fund statements (If you reinvest dividends) – Many taxpayers use the dividends they receive from stocks or mutual funds to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property. This means they reduce gain when it is finally sold. Keep the statements at least four years after the final sale.
  • Tangible property purchase and improvement records – Keep all records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records. The thinking was that the large exclusions would cover any potential appreciation in the home’s value. Now that exclusion may not always be enough to cover sale gains. This is particularly the case in markets where property values have steadily risen. Records of home improvements are vital. The records can be important to prove your deductions. Please use caution when discarding them.

What about the tax returns themselves?

Disposal of the back-up documents used to prepare the returns can usually be done after the statutory period has expired. However, you may want to consider keeping a copy of your old tax returns. These should include the 1040 and any attached schedules or statements,  plus your state return indefinitely. That’s right, forever! If you just do not have room to keep a copy of the paper returns, securely digitizing them is an option. Use caution when opting to do this. Remember, the cloud is a very curious place for your personal information, and hackers would love to get their hands on it.

Do you have more questions about tossing old tax returns?

If you have questions about whether or not to retain certain old tax records, WorthTax can help you work through all the documents. Give Alex Franch, a call first at 781-849-7200, and make an appointment today.

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