Saving your tax records-what you need to know

April 15th is seen as the end of
the traditional tax-filing season. And, while it may be tempting to purge
certain tax documents from your files for the current and past tax years, you want
to be careful. It is important to retain relevant tax records in the event that
the IRS — or another taxing authority — requires that those records be produced
as part of an audit.

Keep at Least Three Years

The following records are
commonly used to substantiate a taxpayer’s income and deductible expense items:

• Form(s) W-2
• Form(s) 1099
• Form(s) K-1
• Bank and brokerage statements
• Canceled checks or other proof of payment of
  deductible expenses

At a minimum, the above tax
records should be kept for a three-year period following the date that you file
your return (or its due date, if later).

However, the IRS’s time limit for
initiating an audit on a return where income was grossly understated, but no
fraud is discovered, is six years. Therefore, it is ideal to retain the above
documents for six years to better protect yourself in the event of an audit.

Similarly, you should keep
investment records (brokerage statements, etc.) after you liquidate any given
investment. Documentation that substantiates the gain or loss on an investment
should be kept for the length of time that corresponds with the time frame that
you retain other tax documents related to the return on which you report the
sale.

Prior Years’ Tax Returns

It is also a good idea to
maintain one or more permanent files with important legal and personal
documents, including those relating to taxes. Specifically, as a general rule,
you should retain copies of your federal and any state income-tax returns (and
any tax payments) indefinitely. For
instance, the IRS or another taxing authority could claim that you never filed
a particular year’s return. If that occurs, the IRS (or other authority) could assess
tax and penalties relating to the return in question. You will need a copy of
your return to bolster your position that you actually filed the return.

Need More Information?

Filing your returns on a timely basis
is just one aspect of properly handling your taxes. Be prepared to defend yourself
in the event of an audit by retaining your records for the appropriate time
period. Contact us if you have any further questions.