IRS Recordkeeping Tips

Dictionary.com defines recordkeeping as "The maintenance of a history of one's activities, as financial dealings, by entering data in ledgers or journals, putting documents in files, etc."

Notice it doesn't say anything about receipts stuffed in sock drawers or copies of prior year tax returns dog-eared and sandwiched between a couple of Chinese takeout menus. The IRS can't help you to be a tidy and orderly person, but they can let you know how long you need to hold on to your tax documents, using whatever "filing" system you find effectual.

Here are some simple recordkeeping tips:

In general, a taxpayer should hold on to complete tax records, including a copy of their return and all related schedules, forms and payer statements (W-2s, 1099s, etc.) for a period of three previous filing years, until the limitation period expires.

The period of limitation on a tax return is the time in which one can amend their return to claim a credit or refund; it is also the time the IRS has to review all tax returns via a document matching system.

According to the 1040-X instructions, an amended return must be filed within within 3 years (including extensions) after the date the original return was filed or within 2 years after the date the tax was paid in full, whichever is earlier.

If a tax return was filed prior to the April 15^th due date, the three years commence on April 15^th. The same is true with an extension to file, which grants a taxpayer an automatic 6-month extension. If the return is filed prior to the extended date, the three years begin on October 15^th.

Of course, any time you realize that something has been left off of the return which will cause an additional amount of tax to be owed, you must amend it, even if three years has already passed. More than likely however, this has already been detected and corrected via the IRS document matching system, whereby information reported on tax returns is compared to all payer information reported to the IRS. If there is a shortfall, the IRS may issue a proposed assessment by way of a paper audit.

Certain records do not need to be sent to the IRS, but again should be kept for at least three years. These would include any personal information or logs that have been used to figure an entry on your tax return. Mileage records or receipts from actual use of a vehicle, invoices for the cost of purchased goods, logs of your gambling losses that offset your winnings, charitable contributions and any receipts that support your business expenses are all examples of records that should be kept with your taxes. If you are audited, you will need to substantiate your line entries on the return.

Some tax documents should be kept longer than three years. If you are an employer, and you file a quarterly Form 941 and an annual Form 940, keep your employment tax records at least 4 years after the date that the tax becomes due or the date the tax is paid, whichever one is later.

Additionally, certain records should be kept longer. Casualty or theft losses (car accidents, property losses from fire or storms, stolen property), investment gains or losses including carrybacks on net operating losses, and all documents regarding the purchase and or sale of a home should be kept for seven to ten years.

If you did not make or retain a copy of a tax return, and you cannot get it through your tax preparer, you can request it from the IRS using Form 4506. There is a charge for the IRS to pull the physical return out of archives, photocopy the return and all related documents, and mail it out to you.

For additional information, see Publication 552, Recordkeeping for Individuals, and Publication 583, Starting a Business and Keeping Records.