How to prepare for a tax audit.
Want some helpful hints on how long to save documentation or what documentation is needed? Then this is for you.
Under the statute of limitations the IRS has three (3) years in which to audit a return. So minimally three years of documentation should be kept. However, many experts recommend keeping records for six (6) years. If the IRS suspects that you underreported income by 25% or more, it has up to six years to launch an audit.
You should also know, that if you don’t file a return and you owe taxes or if you file a fraudulent return, the IRS can come after you at any time to claim what’s due. If you were to die, the IRS can take any money you owe out of the estate you leave behind.
To ensure that you’re well prepared in the event that you are audited, maintain good records and receipt files. What should be kept are any forms and statements that show income or support deductions (W-2s, 1099s, canceled checks, receipts, etc.), as well as copies of your return.
There are some records you should keep indefinitely for tax purposes. These include:
Statements documenting retirement-account activities, especially records of your after-tax contributions so you don’t get taxed on them again when you withdraw them.
Records of your investments (what you own, what you paid, when there were splits and distributions), which are useful both in determining your tax basis when you sell and allowing your heirs to trace the origins of an investment if it’s bequeathed to them.
Home ownership papers, as well as receipts documenting home improvements, which will come in handy when you sell your home.
Copies of old tax returns.
