Don't Toss Up Your Tax Records After Filing the Return, You May Need Them Later!

Your tax records should be made up of any documents that prove a claim or deduction you made on your tax returns. If you took someone out for a business dinner, you should keep that receipt. If you had new windows installed in your home, you should have a record of that. If you bought a laser copier for your home office, you should have kept the receipt from that purchase.

How long you should keep these tax records depends on a few variables. First, there is a three-year statute of limitations to file your tax return, but that doesn't mean you should scrap your tax records after only three years. There is a tax due exception to this rule that states the statute does not start until you pay the tax due and then runs for two years instead of three.

Now, if the Internal Revenue Service claims that you underpaid your taxes by 25% or more, the statute of limitations moves to six years. Most people feel that six years is the magic number for holding on to tax documents.
There is more that comes into play here, however. If you don't file a tax return, there is no statute of limitations and the Internal Revenue Service can pretty much look into absolutely everything you have ever done pertaining to your taxes. The same is true if you are accused of filing a deceptive return, intending to evade your taxes.

There is also the situation of capital gains, which speaks to holding tax records for far more lengthy periods than we have so far discussed. The best example of this is your home. The way to figure the capital gains tax on your home is most simply expressed by subtracting the amount you paid for it and spent on it from the amount you receive at sale. There are certainly much more detailed variables that come into play when you sell your home, but for the sake of our purposes here, purchase price plus upkeep, subtracted from sale price is easiest.

Now, how long will you own your home before you sell it? You may own it for ten years, or fifteen years, or even twenty years before you sell. So, you will need to hang on to the original sales contract along with all the repairs and improvements bills for that number of years.

So you see, there is no simple suggestion for how long to hold on to your tax records. You should keep all of them at least six years, and some others even longer depending on your circumstance.

For most of the people, filing of tax return is just like a nightmare. Once the filing is done, they don't keep carefully all the documents and papers on the basis of which they filed their tax return. This is a big mistake. There are certain rules to keep your tax records so that you can use them in case of a tax audit. Chintamani Abhyankar explains the importance of keeping tax records and the time period for which they should be kept.

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.