Cygnet Income Tax & Bookkeeping Service

Keep or Toss?

What Tax Documentation Should You Save?

Once you’ve completed your taxes and amassed all your receipts, forms, and statements, what do you do next? What gets kept and what gets tossed? Remember, the main reason to save records of any type is to substantiate the information reported on tax returns.

"The IRS is stepping up enforcement, so it is imperative that taxpayers keep their records and receipts handy," notes Steven P. Bigos, EA of Cygnet Tax in Warwick, RI.

Save:

• Copies of your completed tax returns, attachments, and receipts that verify receipt of your filed forms by the IRS.
• Records that help identify sources of income including those that:
• Track expenses;
• Determine the value of property; or
• Support any numbers or claims made on your prepared tax returns.

Place your records in files listing the year and the following titles: Income, Expenses, Home, and Investments. You can safely toss other paperwork in the trash unless you prefer to keep items for historical value.

What types of records may affect future transactions? According to, Steven P. Bigos, an Enrolled Agent in Warwick, RI, retaining records that substantiate the value of property is essential if the property may one day be a gift. This is because the donor-taxpayer's income tax basis in the property carries over to the donee. After 2009, step-up (and step-down) in basis will be replaced by modified carryover basis. New rules may severely impact cumulative tax-free exchanges of real property, absent accurate records. The end of tax season is a good time to update estate plans.

“Likewise, small businesses, sub-chapter S corporations, and partnerships are responsible for keeping track of the shareholder adjusted basis,” reminds Steven P. Bigos, Enrolled Agent of Warwick, RI. “It is better to keep this information current than wait until you need it for tax purposes later. Ask your Cygnet Tax to help you with this.”

Other statements that may affect future transactions include:

• Investment account statements and home expenses. These are important to keep as long as you own the investments, plus a minimum of three years afterwards unless your state requires a longer statute of limitations.
• Gifts and inheritances that establish values.

Following your state’s statute of limitations is a good rule of thumb for saving all records, though some enrolled agents prefer to keep six to ten years of substantiation. Of note to remember: A return that was never filed has no statute of limitations. Also, the statute of limitations for returns where income was understated by 25 percent or more is six years.

After you file this year’s records with those from past years, weed out old files that are beyond the statute of limitations. But, before tossing, examine receipts once more to see if they contain information for future transactions. If not, go ahead and toss them.

“The new ‘Check 21’ regulations that allow banks to send us copies of cancelled checks in our bank statements assist in keeping cancelled checks in an organized, space-saving manner,” notes Steven P. Bigos, an Enrolled Agent in Warwick, RI. Another space-saving measure: scanning your documents and writing them to a CD or DVD. "It's easy to condense all your records for a year down to one CD, including a copy of the tax return.”Cygnet Tax can provide a CD to their clients. It's much easier to keep six CDs than six years worth of shoe-boxes. An added benefit is that you don't have to worry about the fading of thermal paper receipts that happens when you store your original records in the attic." Keep or toss . . . if only it was as easy as it sounds.

Cygnet Tax is a Member of the National Association of Tax Professionals (NATP)

251 Pawtuxet Avenue, Warwick, RI 02910
401-942-1040