Morgan Stanley does not render advice on tax or tax accounting matters to clients. You should always check with a tax and legal adviser before engaging in any transaction involving IRAs or other tax-advantaged investments. Tax season doesn’t end when
Tax season doesn’t end when the form is in the mail. Here are guidelines to help you keep good records.
Now that you have completed your 2005 income tax returns, you may want to keep in mind some record-keeping rules. With luck, you will never need to look at them again, but the general rule is keep any record necessary for the IRS to determine your correct taxes for as long as the IRS can audit your return (i.e.; until the statute of limitations has run out).
Basic records
Taxpayers need to keep real estate and investment records for at least three years after the due date for filing the return for the tax year during which their home or other investment is sold. (Some people keep their records for seven years for reasons discussed below.)
Real estate records include closing statements, purchase invoices, insurance records and home-improvement receipts. Investment records include brokerage statements, mutual fund year-end statements, Forms 1099, Forms 5498 (IRA Contribution Information) and Forms 2439 (Notice to Shareholder of Undistributed Long-Term Capital Gains). These records are necessary to determine the cost basis in a home or other investment. The three-year period for keeping investment records begins with the filing due date after you have finished closing out a position in a particular stock, mutual fund or other security, not when you start to sell a portion of the position. Also, if you have ever made nondeductible IRA contributions, you need to keep a copy of the most recent filed IRS Form 8606 (Nondeductible IRAs); this will enable you to determine accurately what portion of each year’s IRA distribution is tax-free.
Federal income tax return records
Taxpayers need to keep copies of tax returns for at least three years after the filing due date, including extensions. For example, if you file your 2005 Form 1040 (U.S. Individual Income Tax Return) on or before April 15, 2006, you need to keep a copy until April 15, 2009. If you file for an extension, then you would need to keep a copy of the return for three years from the actual filing date.
There are many reasons, though, to keep copies for at least seven years. A taxpayer may amend a return up to seven years after filing to claim certain deductions. In addition, the IRS may audit a return for up to six years after the filing due date, including extensions, if the taxpayer substantially underreported gross income. (The IRS may audit a taxpayer at any time for any tax year if it believes that a fraudulent return was filed for that year or the person did not file a return at all for that year.)
Along with a copy of the return, a taxpayer needs to keep for seven years copies of all records needed to substantiate income (such as W-2s), expenses (such as receipts), deductions (such as receipts, invoices and canceled checks), contributions (such as letters from charities showing they received the contributions and IRS Forms 5498 showing contributions to IRAs) and credits (such as the worksheet to determine the Child Tax Credit) shown on an income tax return.
State records
States might have different statutes of limitations for auditing a return from those of the IRS. Taxpayers need to keep copies of all records necessary to substantiate amounts shown on a state tax return, along with a copy of the return, until the state statute of limitations has expired.
Lost tax returns
The IRS can provide a copy of a previously filed return (including all attachments) if an investor submits a Form 4506 (Request for Copy of Tax Return). There is a charge for this service.
Gifts
If you receive a gift of assets (other than cash), you need to have a record of the donor’s cost basis because the basis of assets given to a donee is generally the donor’s basis. Since the donor may have purchased the assets many years prior to making the gift, you ought to determine and document the assets’ basis; this may save you much time and many problems when the assets are eventually sold.
Inherited assets
You need to keep records of assets received as an inheritance for as long as you hold the assets. The records need to include the assets’ values used for estate tax purposes, which become your cost basis in the assets.
Taylor Easley and Dale Ishida Suezaki are financial advisers at Morgan Stanley, 329-7979.
Morgan Stanley does not render advice on tax or tax accounting matters to clients. You should always check with a tax and legal adviser before engaging in any transaction involving IRAs or other tax-advantaged investments.
