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november 11, 2007 --How long should I keep copies of my tax returns and related documents?

Personal income tax records may have to be produced if IRS or a state or local taxing authority was to audit your return or seek to assess or collect a tax. In addition, lenders, co-op boards, or other private parties may require that you produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you.

Keep returns indefinitely and the supporting records usually for six years. In general, except in cases of fraud or substantial understatements of income, IRS can only assess tax for a year within three years after the return for that year was filed or, if later, three years after the return was due. For example, if you file your 2007 individual income tax return by its original due date of April 15, 2008, IRS will have until April 15, 2011 to assess a tax deficiency against you. If you file your return late, IRS generally will have three years from the date you filed the return to assess a deficiency.

The problem with the three-year rule is that the assessment period is extended to six years if more than 25% of gross income is omitted from a return. In addition, the assessment period doesn't begin to run until a return is filed. Therefore, if IRS claims that you never filed a return, it can assess tax for that year at any time, unless you can prove that you did file. If you file your returns electronically, be sure to get copies from the company that prepared and/or filed your return; it is required to provide you with a paper copy of the return.

Records relating to property may have to be kept longer. Keep in mind that the tax consequences of a transaction that occurs in one year may depend on things that happened in earlier years-and that the period for which you should retain records must be measured from the year in which the tax consequences actually occur. This may be significant, for example, where you sell property that you bought years earlier. Those records should be kept for at least six years after your return is filed instead of just six years after the transactions they relate to occurred.

Similar considerations apply to other property which is likely to be bought and sold-for example, stock in a business corporation or in a mutual fund, bonds, cars used for business, etc.

Loss or destruction of records. To safeguard your records against loss from theft, fire or other disaster, you should consider keeping your most important records in a safe deposit box or other safe place outside your home.

If records are lost or destroyed, it may be possible to reconstruct some of them. For example, a paid tax return preparer is required by law to retain, for a period of three years, copies of tax returns or a list of taxpayers for whom returns were prepared. Most preparers comply with this rule by retaining copies and can furnish a copy if yours is not available. Similarly, other professionals who assisted you in a transaction may retain records relating to the transaction. For example, a stockbroker through whom you bought securities may be able to help you to determine the basis of the securities, and an attorney who represented you in the purchase of your home may retain records relating to the closing. Nonetheless, because you can never be sure whether those persons will actually have the records you need, the safest course of action is to keep them yourself, in as safe a place as possible.

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