Keep those records

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Clients ask from time to time how long they should keep copies of their records. They often say that they have heard that you should keep records for 3 years or 7 years or 10 years. This article provides record retention guidelines for various purposes including income taxes, capital gains taxes, and some other non-tax purposes.

The IRS can reopen tax returns up to 3 years after the return was due to address minor underpayment issues. That should tell you that the minimum time to keep tax records and receipts is 3 years for the normal examination period.

The IRS gets 6 years to audit your records if you underreport your income by more than 25% of the gross income reported on the return. For example, if the taxpayer reported $100,000.00 of income, but actually earned $130,000.00 of income, the taxpayer would have understated income by 30% and the IRS would have 6 years to catch the error. Because some tax calculations can be subject to legal interpretation, we recommend keeping records for at least 6 years to defend against audits for substantial underpayment.

The IRS has no limits on its ability to catch a crooked taxpayer. If the taxpayer misstated income fraudulently, the IRS could haul the taxpayer off to jail 30 years later for a fraudulently filed tax return.

The capital gains tax is a percentage of the gain (same thing as profit) from sale of land, stock, or other “capital” assets. The IRS calculates gain by subtracting a seller’s investment in the property from the sale price. The investment in the property is referred to in the tax law as the person’s “basis.” If a farmer builds a building and then sells the property, the basis will include the original real estate purchase price plus the building construction cost (and minus any depreciation deductions on the building). Unfortunately, too many people build or remodel buildings without keeping construction receipts, so they cannot prove the value of their basis. These people often pay excessive capital gains taxes. It almost always pays to keep all records of real estate purchases and sales, and building construction and remodeling costs for as long as you own the property.

Some people share their assets by investing in property together or holding joint bank accounts. These people should retain deposit records to show who contributed the assets to the shared ownership for as long as the shared ownership lasts. Otherwise, one owner’s creditors may try to take an entire jointly owned asset without giving credit to the other co-owner for that co-owner’s investment in the asset.

Medicaid requires most nursing home residents to account for gifts and all real estate and financial transactions for at least 5 years. Medicaid also requires records if a married person has ever required hospital or rehabilitation facility care for more than 30 days, so the couple should keep all financial records for the first month of the hospitalized spouse’s admission for the rest of that person’s life.

So how long should you keep records? You should keep records as long as you can because you never know which records may be important later. No honest person suffers harm from keeping all possible records, but many people suffer great hardship when they pitch records too soon. Better to be safe than sorry.

Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and Jeff is a Fellow of the American College of Trust and Estate Counsel. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator and the 2014-15 President of the Indiana State Bar Association.

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