Once you have completed your 2022 tax return, you may be curious about what tax documents you can toss in the recycling bin and how long you should keep other important documentation. You might be required to produce these records if the IRS decides to audit your return or needs to assess tax.
It’s a smart move to keep all of your actual returns on hand indefinitely, but what about other supporting documents like canceled checks and receipts? Except in cases of fraud or a substantial understatement of income, the IRS can only assess your taxes within three years after you initially filed your return or three years after the return was due.
For example, if you filed a 2019 tax return by its due date of April 15, 2020, the IRS has until April 15, 2023, to assess a tax deficiency. If you file late, however, the IRS has three years from the date you filed.
This period, however, can be extended to six years if more than 25% of your gross income is omitted from your tax return. Additionally, if no return is filed, the IRS can assess your taxes at any time. If the IRS claims you never filed a return for a specific year, a copy of your return will help you to prove that you did so.
Property-related records
The tax consequences of a transaction that takes place this year may depend on events that took place years ago. For example, if you purchased a new home in 2007, made capital improvements in 2014, and sold it this year, you would need to determine the tax consequences of the sale.
To do this, you must know your basis in the home (your original cost), plus later capital improvements. If you’re audited, you may be required to provide records related to the original purchase in 2007 and the capital improvements in 2014 to prove what your basis is. This means you should keep those records for at least six years after filing your return for the year of sale.
Keep all your records related to home purchases and improvements, even if you expect your gain to be covered by a home-sale exclusion, which can be up to $500,000 for joint tax return filers. You’ll still need to prove the amount of your basis if the IRS inquires. Plus, there’s no telling what your home will be worth when you sell it, and there’s no guarantee that the home-sale exclusion will still be available to taxpayers at a later date.
Other considerations apply to property that’s likely to be bought and sold—think stock shares in a mutual fund or other investments. It’s important to note that if you reinvest dividends to buy additional shares, each reinvestment is a separate purchase.
Separation or divorce
In the event of a separation or divorce, make sure you have access to tax records related to you that are kept by your ex-partner. Better yet, make copies of these records so that you don’t have any difficulties accessing them. It’s important to keep copies of all joint returns filed and supporting documents because both spouses are liable for tax on a joint return, and a deficiency may be asserted against either spouse.
Other important documents include:
- Agreements or decrees over custody of children.
- Agreements over who is entitled to claim children as dependents.
Loss or destruction of records
To ensure that your records are protected against fire, theft, or other disasters, it’s worth considering keeping papers in a safe deposit box or another safe place outside of your home. Additionally, consider keeping copies of documents in an easily accessible location so that you can quickly secure them in case of an emergency.
Make sure you’re ready for any tax issues with Smolin
If you want to find out which specific documents you should keep for any potential dealings with the IRS, contact us for more information.