Keeping Accurate Tax Records

That time of year is fast approaching. Christmas and New Years are on our minds and then we have to file our taxes. One of the questions we receive every year has to do with records retention. What to keep? How long to keep it? Why keep records? Here is an interesting article from AccountingWEB.com that addresses the topic:

Taxes are finished; which documents should you keep or pitch?
May 11, 2011You’re done with the taxes for another year. Time to dump the all the receipts and paperwork associated with preparing the return, you think. Not so fast, cautions the Minnesota Society of Certified Public Accountants. You might need some of that documentation if you get audited; without it, tax benefits that you claimed could be disallowed.

“The IRS generally has three years after you file your federal return in to commence an examination of that return,” said Robert Lynn, a MNCPA member with Charles M. Bartley, CPA, Ltd. “The major exceptions are cases where a large portion of income is omitted (a six-year limit can apply then) and cases of willful failure to file returns or purposefully fraudulent returns (where no time limit applies).”

In Minnesota, the general time limit is 3 and one-half years, not three years, with extended time limits similar to those in federal tax law. Here’s what Minnesota CPAs recommend for record retention for income tax purposes. What you keep to satisfy loan agreements, for employment in certain industries or government, or for other specialized purposes may be more involved.

• Six to seven years – Tax returns and backup documentation for both income and deductions. Pay special attention to mutual fund and brokerage year-end statements which are often revised. Keep cancelled checks and receipts or acknowledgements to support deductions.


• One year – Monthly bank records, brokerage statements, pay stubs and other financial data summarized at year-end by a Form W-2, 1099 or other official tax reporting form. Verify that your monthly activity agrees with amounts on those forms.


• Indefinitely – until at least three years after disposing of a particular property – Employer retirement plan documents (even if you no longer work for the company, as long as you are entitled to benefits); IRA contribution records for any accounts that include “after-tax” amounts; purchase records for stocks, mutual funds or any other securities; documentation of the purchase price and major improvements for your home and any other real estate; and similar documentation for big ticket items such as jewelry, antiques or collectibles. Keeping these records also helps to prove value in the event of loss or damage), both for tax and insurance purposes.

Why Keep Records?

There are many reasons to keep records. In addition to tax purposes, you may need to keep records for insurance purposes or for getting a loan. Good records will help you:

• Identify sources of income. You may receive money or property from a variety of sources. Your records can identify the sources of your income. You need this information to separate business from nonbusiness income and taxable from nontaxable income.


• Keep track of expenses. You may forget an expense unless you record it when it occurs. You can use your records to identify expenses for which you can claim a deduction. This will help you determine if you can itemize deductions on your tax return.


• Keep track of the basis of 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. Good records help you to file quickly and accurately.


• Support items reported on tax returns. You must keep records in case the IRS has a question about an item on your return. If the IRS examines your tax return, you may be asked to explain the items reported. Good records will help you explain any item and arrive at the correct tax with a minimum of effort. If you do not have records, you may have to spend time getting statements and receipts from various sources. If you cannot produce the correct documents, you may have to pay additional tax and be subject to penalties.