Save key tax records in case you're audited

Your Money

April 29, 2007|By Carolyn Bigda | Carolyn Bigda,Chicago Tribune

Tax season is officially over. But your desk or kitchen table might be buried under piles of statements and receipts.

Though it would be nice to dump the whole lot in the trash, don't be too eager. You need to hang on to some of those documents in case Uncle Sam decides to audit your return.

The chances of that dreaded event are rising, too. During the past few years, the Internal Revenue Service has stepped up enforcement efforts - and not just for the super-rich. Last year, the IRS examined some 817,000 nonbusiness returns filed by people making less than $100,000, up 53 percent from 534,000 in 2001.

That translates to less than 1 percent of taxpayers, but it's worth having your records in order just in case. Here is what you need to save and for how long, and what can be tossed:

Make room in storage.

The IRS has up to three years after a return is due to start an audit. But if you underreport your income by more than 25 percent, the deadline extends to six years. And if the IRS suspects you failed to file a return or committed fraud, it can audit you at any time.

As a result, you should keep your tax files for a minimum of six years, said Mark Luscombe, the principal federal tax analyst for CCH Inc., which provides tax information and software.

A common issue: "You may not know if you have an understatement," Luscombe said, especially if an employer has an old address and a W-2 didn't reach you.

While you want to keep any W-2s and 1099s, you can get rid of last year's pay stubs. The W-2 and 1099 should recap how much income, interest and dividends you earned, as well as how much you paid in taxes.

Print a return.

More than half of individual returns are filed electronically. If you're among them, make sure to print a copy of your return. Or back up an electronic version so that the return is not lost if your computer crashes.

Keep your receipts.

Hang onto any paper that confirms a tax deduction or credit. The list may include receipts, credit-card and bank statements, canceled checks and student loan interest statements.

Although you can request copies of statements from your bank, you may be charged a fee to receive them. And if you can't come up with the supporting documents, you'll have to pay Uncle Sam the tax owed plus interest until you send in the check - today, 8 percent annually plus a late-payment fee of 0.5 percent per month.

As for other receipts and credit- card statements lingering in your shoebox from the year, shred them (as long as they're not needed for warranty purposes).

Save investment records.

You don't need to file away every quarterly statement from your retirement plan, such as a 401(k), 403(b) or individual retirement account. But keep the most recent version of forms that show when you make contributions, conversions or distributions for as long as you have the account (then hold them for six more years).

For investments outside of a retirement plan, you need to prove the "cost basis," or price you paid for a stock or mutual fund, so the IRS can calculate how much to tax you in capital gains. Hold onto that paperwork, including statements that detail stock splits or dividend reinvestment, for as long as you hold the asset (plus six years).

Track homeowner costs.

Similarly, you want to hang onto most homeownership documents for as long as you own the property (again, plus six years). That includes any receipts for home improvement projects.

Although many home sales are free of capital gains taxes, you do have to pay sometimes, so documenting these projects can help lower the tax bill when it comes time to sell - as long as you have the paper trail.

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