Keeping Tax Records

Important tax statements for the April 15, 1999, filing deadline are starting to arrive in the mail. Taxpayers must (1) assemble these documents in order to prepare the current year tax return, and (2) retain the documents for future use or in case of IRS questions/audit. The following are some points to remember about tax statements and other supporting documents.

Verify Documents: Check all amounts reported on Forms W-2, 1098, 1099, and other tax statements and notify the issuer immediately if errors are noted. The IRS compares its copy of tax statements to amounts reported on the tax return, and issues notices for items that do not match. Therefore, an IRS notice or audit may be avoided if tax statement errors are corrected before the tax return is filed.

Record Retention: As a general rule, the IRS has three years from the tax return due date (plus extensions) to examine the return. In most cases, taxpayers have the same time period to amend a return for items of income or deductions. Consequently, records that substantiate amounts included on the tax return should be retained for at least this three-year period. Tax statements and other records relating to long-term tax items (for example, primary residence, stock/mutual fund investments) should be retained for at least three years after the property or investment has been sold. A longer retention period is recommended/mandated in certain other situations. The following chart summarizes the statute of limitations (that is, record retention period) for several different situations.

Description	Retention Period
Additional tax due (except in the following three situations)	3 years
-- Failure to report income that is more than 25 percent of gross income	6 years
-- Fraudulent tax return filed	No limit
-- Failure to file a tax return	No limit
Claim for credit or refund after tax return filed	3 years (or 2 years after tax was paid, if later)
Claim for loss from worthless securities or bad debt deduction	7 years

The total cost of the residence and improvements will be needed to determine the amount of capital gain (if any) recognized when the residence is sold.

Stocks and Mutual Funds: The mutual fund and brokerage industries do an excellent job maintaining records of transactions. However, taxpayers should maintain their own permanent files of purchase and sale transaction documents -- it may take several days or weeks for a brokerage firm or mutual fund company to respond to a request for information on transactions that occurred years ago. Confirmation advices from the brokerage firm should be kept for securities (for example, stock, bond) transactions. Record keeping for purchases and sales of mutual fund shares can be more burdensome because dividends (generally ordinary income in the year paid) frequently are reinvested in mutual fund shares (thereby increasing the cost basis of the shares owned). To keep track of the basis in mutual fund shares, mutual fund investors should retain their monthly or year-end summary account statements.

Gift and Inheritance: If property is received as a gift, the donee’s basis is a carryover basis (that is, the donor’s basis in the property) plus any gift tax paid on the transfer by the donor -- the carryover basis is limited to the fair market value (FMV) of the property. The donee should obtain and maintain in his/her personal files copies of documents supporting the donor’s basis in the property and taxes paid.

The basis of property received by inheritance generally is the FMV of the property at the date of the donor’s death. The donee’s basis usually is the amount shown on the Form 706, Federal Estate Tax, filed by the decedent’s estate. Therefore, the donee should retain a copy of this Form 706.

Charitable Deductions: Charitable contributions of $250 or more must be substantiated by a contemporaneous written acknowledgment from the charitable organization. The IRS will not accept canceled checks as substantiation of such contributions.

Taxpayer Identification Number (TIN): In most cases, an individual’s Social Security number is his/her TIN. The IRS can deny a personal exemption and the dependent care credit if a tax return is filed without a TIN for a claimed dependent. Failure to provide a TIN for a dependent will be treated as a mathematical/clerical error, which means the IRS can disallow the exemption and recalculate the tax without contacting the taxpayer.

These are some thoughts to consider about tax statements and other supporting documents for individual tax returns. Your Deloitte & Touche financial advisor also can provide information and should be consulted before any action is taken.

\| DT Online Home \| Site Search \| Personal Finance Advisor \|
	Keeping tax records Personal Finance Advisor by Deloitte & Touche OnLine February 22, 1999