At Tax Time, It’s Often a Matter of Records

As another income-tax season comes to a close, it leaves behind its standard legacy in millions of households--a fresh set of tax-return copies and other records to be filed away.

Before those documents are consigned to the back of a drawer or closet, anyone who has been through the drill a few times might pause to reflect on the state of his or her tax records in general.

Just how much of the paperwork really needs to be kept, and for how long? Is it safe to throw away the 1975 folder to make space for the one for 1992?

These may be much more than idle questions. As the tax advisers at H&R; Block put it in their 1993 Income Tax Guide, “The best strategy for paying the least possible tax is keeping good tax records.”

In general, taxpayers are advised to keep a copy of each year’s returns permanently, as documentation and a reference point for a wide range of possible future needs.

And as for the canceled checks, receipts and bank statements that support those returns, three years beyond the date when a return was due is considered an absolute minimum retention period, since the Internal Revenue Service has that long to decide whether to audit it.

“Some authorities advise keeping them for six years,” points out the J.K. Lasser Institute in its current tax guide, “since in some cases where income has not been reported, the IRS may go back as far as six years to question a tax return.

“In cases of suspected tax fraud, there is no time limitation at all,” Lasser adds.

Whether or not the auditors come calling, some records need to be kept indefinitely--for instance, anything that establishes the cost basis of an asset you might sell in the future.

That includes stocks, bonds, mutual funds, real estate and collectibles, along with any other asset that can fluctuate in value.

“The buy and sell confirmation slips that are forwarded by your broker are the primary source of data for your securities records,” points out the national accounting firm of Deloitte & Touche.

“It is important to develop a record-keeping system to allow you ready access to this information. Ledger cards or computer files for each security are popular methods.”

These files should contain records of commissions paid, dividends reinvested, stock splits, or anything else that might affect the calculation of the gain or loss realized when you sell the investment in question.

If you ever make a non-deductible contribution to an individual retirement account, the experts point out, accurate records of it are essential to avoid paying taxes on the money a second time when you withdraw it from the IRA.

Few assets are likely to require more records of this sort than a house, whose cost basis may be altered by a purchase as small as a new fixture for the front door.

“Capital improvements may be added to the cost or adjusted basis of a residence for income tax purposes,” says Deloitte & Touche.

- “Often, a taxpayer who moves to a new residence and defers the gain will forget to increase the basis of the new residence for capital improvements in the old residence.”

It’s never too late to go back and try to reconstruct cost-basis records for an investment such as a house. But the task may be pretty difficult if all your old checks and receipts have been lost or thrown away.