Only a few income tax returns are selected for audit by IRS.
Sometimes the IRS will ask for verification of just a few items on a return.
The records and information used to prepare the returns need to be saved until it is clear the Statute of Limitations is closed.
IRS publication 552 (revised Jan. 2011) on Page 6 explains the Statute of Limitations or Period of Limitations varies. The general rule is three years after filing.
However, if the income originally reported is less than it should have been - more than 25 percent of the income was not reported, then the period is six years.
If the return was never filed or was a fraudulent return, the matter is always open for IRS audit, unlimited time.
Of course there are other rules, but they don't usually apply to most folks.
Your tax records will help identify the sources of income, keep track of expenses and show the tax basis of your property. That can be your cost or in case of certain property inherited it is probably the fair market value at date of death.
The main reason to save tax records, receipts, etc., is to support the deductions that were claimed on the returns.
We suggest each year be treated as a separate matter. Saving records in a box or file by year makes it easier to choose what is to be destroyed after the Statute of Limitations has passed and IRS can't audit that year.
In addition to banking records, credit card records (statements and receipts) are usually very important and helpful.
The cost of something you still have, like your home, can be important to save until years after the home is sold. We have a handout that is a list of all the improvements you may have done to your home. The cost of those improvements is added to the purchase cost to compute your tax basis in the home. If you want a copy of that free handout, please stop by our office or send us a letter requesting a copy of the handout.
If you own a mutual fund and the dividends are reinvested (to buy more shares), be sure to add the reinvested dividends to the original cost of purchase to figure your tax basis when you sell that investment.
The IRS publications are much better now. Just do irs.gov and choose the forms, instructions, publications, etc., you want.
Did you hear "I've learned that it's easier to keep up than to catch up."
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of "Bullis and Company CPAs, LLC.
