Spring Clean Your Individual Financial Records

thumb drive and pile of financial papersIn general, you must keep records that support items shown on your individual tax return until the statute of limitations runs out — generally, three years from the due date of the return or the date you filed, whichever is later. That means that now you can generally throw out records for the 2013 tax year, for which you filed a return in 2014.

In most cases, the IRS can audit your return for three years. You can also file an amended return on Form 1040X during this time period if you missed a deduction, overlooked a credit or misreported income.

So, does that mean you’re safe from an audit after three years? Not necessarily. There are some exceptions. For example, if the IRS has reason to believe your income was understated by 25% or more, the statute of limitations for an audit increases to six years. Or, if there’s suspicion of fraud or you don’t file a tax return at all, there is no time limit for the IRS to launch an inquiry.

Here are some basic guidelines for individuals.

Completed tax returns. Many tax advisors recommend that you hold onto copies of your finished tax returns forever. Why? So you can prove to the IRS that you actually filed. Even if you don’t keep the returns indefinitely, you should hang onto them for at least six years after they are due or filed, whichever is later.

Backup records. Any written evidence that supports figures on your tax return, such as receipts, expense logs, bank notices and sales records, should generally be kept for at least the three-year period.

Important note: There are some cases when taxpayers get more than the usual three years to file an amended return. You have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out records that could result in refund claims for those items.

Real estate records. Keep these for as long as you own the property, plus three years after you dispose of it and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims and documents relating to refinancing. These help prove your adjusted basis in the home, which is needed to figure the taxable gain at the time of sale, or to support calculations for rental property or home office deductions.

Securities. To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestment and investment expenses, such as broker fees. Keep these records for as long as you own the investments, plus the statute of limitations on the relevant tax returns.

IRAs. The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With the introduction of Roth IRAs, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned.

If an account is closed, treat IRA records with the same rules as securities. Don’t dispose of any ownership documentation until the statute of limitations expires.

Issues affecting more than one year. Records that support figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carrybacks or carryforwards, or casualty losses, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.

Regardless of whether you’re tossing out personal financial documents, or other personal information, always shred them thoroughly first. Also, use proper disposal protocol for any computers and other electronic equipment (such as printers and copiers) that may contain financial data. Simply deleting files using File Manager isn’t enough. Unless you use proper disposal protocol, tech-savvy hackers may be able to recreate sensitive data from the device’s hard drive when it was thrown out, donated to a charity, or returned to the lessor after the lease term expired.

If you have any questions regarding financial records retention, contact your Dalby Wendland tax advisor for more information.

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