Saturday, February 20, 2010

Be Ready for Tax Time

Some certified public accountants state that income tax documentation only needs to be kept for six years, while others vehemently state the paperwork should be retained indefinitely. The Internal Revenue Service has three years from the original due date of the return or the date the return is filed, whichever is later, to audit the return and assess a deficiency, if necessary. If a return reveals a substantial understatement of income (greater than 25% of the amount reported), the statute of limitations period extends to six years. However, there is no statute of limitations if a taxpayer fails to file a tax return or commits fraud.

I did a massive file purge last summer and decided to only keep the last ten years of income tax records. Sometimes in the midst of such a flurry of activity, one may get carried away. I have decided to revert to an indefinite keeper for the reason of the last sentence in the first paragraph. Once in a while, quirky things happen and it would be hard to prove a return was filed if it has been discarded. My 72 year old mother, who has copies of every income tax return she and my father have filed, will enjoy the "I told you so" on this one.

Start a tax file and begin collecting documents that pertain to your tax situation: charitable contributions, medical expenses, real estate purchases or sales, etc. My 2009 taxes are finished and I have already made a 2010 folder, so I can drop in various papers as they arrive. This year, I had all the documents together, except for one paper which took time to track down. Hopefully, next year all the necessary papers will be filed together.

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