You must retain your financial records for as long as they may be necessary for the proper administration of any section of the Internal Revenue Code. In most cases, this implies that you should keep records that substantiate the items reported on your tax return until the statutory period for that return expires.
The statutory period, often referred to as the period of limitations, is the timeframe during which you can make amendments to your tax return to claim a credit or refund or within which the IRS can assess additional taxes owed. Table 1 provides an overview of the periods of limitations applicable to income tax returns. It’s important to note that the years mentioned typically refer to the period starting after the return’s filing date, and returns submitted prior to the due date are considered as filed on the due date.
|IF you…||THEN the period is…|
|1||Owe additional tax, and (2), (3), and (4) do not apply to you||3 years|
|2||Do not report income that you should and it is more than 25% of the gross income shown on your return||6 years|
|3||File a fraudulent return||No limit|
|4||Do not file a return||No limit|
|5||File a claim for credit or refund after you file your return||The later of 3 years or 2 years after tax was paid.|
|6||File a claim for a loss from worthless securities||7 years|
Why Keep Records?
Keeping good records is essential for various purposes, not just for taxes. Here’s why maintaining organized records is important:
Good records help you:
Identify sources of income. Your records can identify your income sources to help you separate business from nonbusiness income and taxable from nontaxable income.
Keep track of expenses. You can use your records to identify expenses for which you can claim a deduction. This helps you determine if you can itemize deductions on your tax return.
Keep track of the basis of the property. You need to keep records that show the basis of your property. This includes the original cost or other basis of the property and any improvements you made.
Prepare tax returns. You need records to prepare your tax return.
upport items reported on tax returns. The IRS may question an item on your return. Your records will help you explain any item and arrive at the correct tax. If you can’t produce the correct documents, you may have to pay additional tax and be subject to penalties.
his section provides an alphabetical list of items that require specific records in addition to your basic records. Here are some examples:
- Business Use of Your Home
- Casualty and Theft Losses
- Child Care Credit
- Credit for the Elderly or the Disabled
- Education Expenses
- Employee Business Expenses
- Energy Incentives
- Gambling Winnings and Losses
- Health Savings Account (HSA), and Medical Savings Account (MSA)IHealth Savings Account (HSA), and Medical Savings Account (MSA)I
- Individual Retirement Arrangements (IRAs)
- Medical and Dental Expenses
- Mortgage Interest
- Moving Expenses
- Pensions and Annuities
Keep Form(s) W-2, Form(s) 1099-R, state income tax forms, and records of real estate and personal property taxes paid.
Maintain a daily record of your tips using Form 4070A or equivalent records.
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