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  • Chris Chapman, CPA, CGMA

How long should I keep my tax documents?

Every year as spring rolls around; we have a very common question, "How long should I keep my tax papers?" My general answer is seven years. If you have dealt with the IRS for anything, you know there is always an exception to every rule. Therefore, seven years will work for many taxpayers. Below are a few scenarios of when you may need to keep documents for much longer.

Scenario 1

Let's say you've made some really bad investments 15 years ago and have a $100,000 capital loss that you can not use in the current year. No, problem, the IRS will allow you to carry that loss forward and use it against future gains.

After 15 years has past and you are still using that loss to offset your current gains your friendly IRS auditor informs you that you are due for an audit. The IRS will ask for documentation on your loss that you are currently carrying forward. Even though it was 15 years ago do you still have all your brokerage statements? Or did you throw them away after seven years? If you have no documentation, then there was no loss. You do not get to use that loss anymore even though it was valid at the time. If you can't prove it, it didn't happen.

Scenario 2

You have a rental home in your possession for about 40 years. You decide to sell it and retire. You sold it for $250,000, and on your tax return, you claimed basis (what you paid for the home plus improvements) of $150,000. You begrudgingly pay tax on the $100,000 gain.

After a year of two later you receive an audit notice. Your friendly IRS auditor takes a look at the rental home sale and asks for documentation on the $150,000 basis you claimed. Do you have the original escrow statement from 40 years ago? Did you keep the invoices for the new roof, and air conditioner you added 30 years ago? Or maybe you found the box, but all the papers disintegrated. No documentation, no deduction. You lose the deduction of $150,000 and get the privilege of paying tax on that amount.

Moral of the story is, make sure you have documentation for EVERY deduction you take. With memory storage so cheap these days, you could scan your documents and store them on a hard drive, or you can upload them to a secure cloud storage site. Some taxpayers believe they will never be in that type of situation; however, these examples are not far out. We recommend you review your tax strategy with your friendly CPA on these types of issues and discuss what tax documents you should be keeping.

Chris Chapman, CPA, CGMA

"Paying attention to simple little things that most men neglect

makes a few men rich."

–Henry Ford

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