“A fine is a tax for doing wrong. A tax is a fine for doing well.” --Anonymous

Saving Records

Why Save Records?

Once you file a tax return, there is no need to keep the records, right? Unfortunately, that perception is wrong. The main reason to save tax records is to substantiate the information reported on the tax return.

The statute of limitations for most federal tax returns is three years. This is extended to six years if you under-stated income by more than 25%. If you fail to file a tax return or file a fraudulent return in order to evade taxes, there is no statute of limitations.

It is important to keep good records so that you have proper documents to back up your claim in case any issues arise.

Records Savvy Individuals Keep?

Most audits occur within three years of the filing of the tax return. It is important to keep receipts used to document income and expenses through at least this period. Since audits can happen after three years, a conservative approach would be to keep these documents for seven years. Here is a list of documents sorted by the recommended length of time to store each document.

Home repair receipts and cancelled checks should be kept for the length of the warranty.

Insurance policies should be kept for three years after the policy has expired (As liability for prior years can vary, always best to check with your agent).

For gifts received, it is important to know the cost to the donor and to obtain receipts for gifts of property other than cash. This becomes the donee’s basis in the property for future sales consequences. This is extremely important when gifting stock among family members such as grandparents to grandchildren. The grandparent’s cost becomes the grandchild’s basis. For gifts reported on a gift tax return (Form 709) the gift tax return should be kept forever.

If you inherit property, you need to keep records that establish the value on the date of death. These records usually come from the fiduciary’s (executor or trustee) records and you should save them for three years after the property is sold.

Records Savvy Businesses Keep

Most audits occur within three years of the filing of the tax return. It is important to keep receipts used to document income and expenses through at least this period. Since audits can happen after three years, a conservative approach would be to keep these documents for seven years. Here is a list of documents sorted by the recommended length of time to store each document.

*Employee Files for ex-employees should be kept for seven years or the statue of limitations for employee lawsuits (which ever is longer).

Insurance policies should be kept for three years after the policy has expired (As liability for prior years can vary, always best to check with your agent).

Net Operating Loss (NOL) for a business can occur when a business has an overall loss on the tax return. NOL is either carried backwards or forward to previous or future returns. Save the records of the calculation creating the net operating loss carryover or carryback until three years after the NOL is completely used.