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How Long Should You Keep Returns and Records? Part I

I often get asked this question, especially during the tax filing season. Many of us would like to eliminate much of the paper clutter we have been accumulating for several years. The answer depends upon what is in the records. This month I will discuss tax returns and supporting records.

I recommend that you keep copies of tax returns indefinitely and the supporting records usually for six years. In general, except in cases of fraud or substantial understatements of income, IRS can only assess tax for a year within three years after the return for that year was filed (or, if later, three years after the return was due). . For example, if you filed your 99 individual income tax return by its original due date of April 15, 2000, IRS would have until April 15, 2003 to assess a tax deficiency against you. If you filed your return late, IRS generally would have three years from the date you filed the return to assess a deficiency.

A problem with the three-year rule, and why I recommend keeping supporting records for six years, is that the assessment period is extended to six years if more than 25% of gross income is omitted from a return. In addition, the assessment period does not begin to run until a return is filed. Therefore, if IRS claims that you never filed a return for a particular year, it can assess tax for that year at any time (even beyond three or six years), unless you can prove that you did file. Proving that you filed would, of course, be impossible after you have discarded your returns. While it's impossible to be completely sure that IRS will not at some point seek to assess tax, retaining tax returns indefinitely and important records for six years after the return is filed should, as a practical matter, be adequate.


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