Read This Before Tossing Old Tax Records

• Posted on May 3, 2011
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Now that your taxes have been completed for 2010, you are probably wondering what old records can be discarded.  If you are like most taxpayers, you have records from years ago that you are afraid to throw away.  It would be helpful to understand why the records needed to be kept in the first place.

Generally, we keep “tax” records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns; and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we actually dispose of them.

With certain exceptions including substantial unreported income or fraud, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later.  However, the statute of limitations for many states is one year longer than the federal.

But Wait!  The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets.  They need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed.  Thus, it makes more sense to keep those records separated by asset.  These records would include stock and investment acquisition records, stock and mutual fund statements, escrow closing statements and improvement cost records for real property, purchase costs for business property and equipment, etc.