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Hanging on to tax records
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February 28, 2001: 7:02 a.m. ET
Pitch your documentation after 3 years...most of the time
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NEW YORK (CNNfn) - With every rule, there is an exception. And when it comes to dealing with taxes, there seem to be many exceptions to every rule, including the rule about how long you should hang on to your tax records.
In general, the Internal Revenue Service says you can pitch all your canceled checks, receipts and sales slips three years after the date you filed those taxes. This April 15, for example, everyone should be able to purge their records for tax year 1997, which were due April 15, 1998. There are, however, several exceptions to that rule.
First, while the federal government has determined you are then free of responsibility for holding all your tax records, not all states' requirements are in line with those the federal government. Some states, according to Cindy Hockenberry of the National Association of Tax Practitioners, have a different statute of limitations.
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Sometimes it's fun to go back and look at old tax records. But for reasons other than nostalgia, it's not necessary to hold on to most of your records for more than three years.
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Cindy Hockenberry
National Association of Tax Practitioners |
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Some, like Wisconsin, allow themselves four years from the date of filing to begin an audit instead of the three given by the federal government. In cases where the state's statute of limitations is longer than the federal government's, filers should hold on to all tax records, including federal tax records and documentation, for the length of time determined by the state statute, said Hockenberry.
"Sometimes it is fun to go back and look at old tax records," said Hockenberry. "But for reasons other than nostalgia, it's not necessary to hold on to most of your records for more than three years."
Some you have to hold forever
There are also records that should be kept indefinitely. Any type of record that can prove the initial price paid for investments may be necessary to prove the amount of gain made on a later sale. If, for example, you purchased shares of stock in 1960 and sold them this year, you will need to prove how much you paid for that investment in 1960. Hockenberry warned that if you get audited and cannot produce the documents to substantiate the initial purchase price, the basis will deemed to be zero.
This rule also applies to investments and property that you inherit from parents or other members of the family, said Hockenberry. "You always have to be able to prove the basis, even on stock your parents may have bought in 1910," she said.
Hockenberry also suggested that tax filers should keep marriage licenses, death certificates and divorce decrees forever handy.
The IRS, in one of its publications on record keeping, notes that while tax filers are only required to keep their W-2 forms for three years after filing taxes, they should actually keep them until the date they begin receiving social security benefits. A question may then arise, points out the IRS, about your work record or earnings in a particular year.
Home records not necessarily keepers anymore
One set of records you may not have to keep are those pertaining to the sale of a home, depending on the value of the home. It used to be that all home owners were told to hang on to documents about their home and improvements they have made to the home forever. That rule has been changed and now only applies to married couples whose homes are valued at more than $500,000 or single people whose homes are valued at more than $250,000 at the time of the sale.
"The new rule is much more friendly to taxpayers," said Frank Degen, a spokesman for the National Association of Enrolled Agents. "Only sales of more than $500,000 for married couples and $250,000 for single people have to be reported. So you don't need to keep records unless you think you home may sell for more than that amount."
More exceptions
Degen noted there are cases where the IRS can begin an audit more than three years after the taxes have been filed. For example, if you have understated your taxes by more than 25 percent, they can initiate an audit six years after you filed your taxes.
And in cases of fraud, if you willfully mislead the federal government about the amount of money you owe, there is no statute of limitations and the IRS can initiate an audit at any time. 
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