How Long Should You Keep Tax Records?
How long do you have to keep your tax records, and what records do you have to keep? Do you have to hold on to years of gas and telephone bills? What about food purchases from your local supermarket?

As taxpayers, we are legally required to keep accurate books and records in the event the Internal Revenue Service ever decides to audit our tax returns.

Not everyone wants or likes to keep unnecessary documentation. Taxpayers should go through their files at least once a year, keeping what you think is important, but discarding a lot of unnecessary documentation. Often, that piece of paper we thought was so important last year is now totally useless. Clearly, those documents which are not used for tax purposes can be thrown out on a yearly basis -- items such as department store statements, utility bills, and food purchase receipt's.

But here's the catch: if you have investment property, and deduct your utility expenses, then obviously you have to keep those records. If you claim an elderly parent as a dependent, then perhaps your food purchase bills should be kept to justify your deductions. The answer to record keeping is to look to the purpose of your documents; if they relate in any way -- even remotely -- to a deduction you intend to claim, you should err on the side of caution and hang on to those records.

Unfortunately, neither the Internal Revenue Service nor the Internal Revenue Code gives us any clear guidelines as to what records must be kept and what can be destroyed. The IRS merely states that records should be kept "for as long as they are important for any Federal tax law."

In general terms, this means that while a taxpayer's return is subject to audit by the Internal Revenue Service, the taxpayer is required to keep his or her books and records.

There is a three year statute of limitations for the IRS to assess a tax and impose a penalty on the taxpayer. Once this three-year period has elapsed and the IRS is no longer permitted to examine your returns for a particular year, you can dispose of that year's records. You should note that the three years begins when the tax return is due; if you filed early, the due date is still the target date. Thus, for example, if you file your 2000 income tax return February 26th, the statute of limitations would expire April 15, 2004. Keep in mind, however, that if you obtain an extension of the April 15 deadline, the statute of limitations begins to run from the date you file your return.

If you filed your return but did not pay your tax until a later date, the statute does not run until two years from the date the tax was actually paid.

However, as in many areas of the law, there are exceptions to the rule. The IRS has the right to go beyond three years if, for example, income has been substantially under-reported by the taxpayer. Under these circumstances, the IRS can go back six years. Furthermore, there is no statute of limitations where a taxpayer files a false or a fraudulent return. The tax for that year can be audited -- and assessed -- at any time.

Most records, however, must be kept by the taxpayer for only three years after the tax return is filed.

That is the general law on record keeping. There are documents, especially involving real estate, which you should keep forever.
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Special Rules For Real Estate