How Long to Keep Receipts for an IRS Audit
How Long to Keep Receipts for an IRS Audit. The odds you'll go through life without facing an IRS audit are good. Only 1.5 percent of returns trigger an audit, the Worldwide Web Tax website states, and those are primarily for returns that look suspicious to the IRS. Nevertheless, it's important that if the IRS does ask for proof of all those deductions you claimed, you have the receipts to show that you're on the level.
The IRS recommends taxpayer save four categories of records: Income; investments; home-related expenses; and receipts for deductions. If you claim a deduction for a student-loan interestt or a charitable donation, for instance, you should have a receipt, a canceled check or both to prove your claim.
If you've been reporting your income accurately, you don't have to keep your receipts for charitable donations and similar write-offs any longer than three years, the IRS limit for investigating good-faith errors. If the IRS believes you under-reported your income by 25 percent or more, it can go back six years, the Bankrate website states. For any year in which you either filed a fraudulent report or didn't file at all, the time limits don't apply, so hang on to your receipts and other documentation indefinitely.
Houses are a special case: If you have any receipts related to improvements, remodeling, upgrades or additions, you should hang on to them until you sell the property. The IRS and some states charge capital gains tax on the difference between the purchase and sale price, but only after you subtract home improvements from the sale price. For example, if you buy a $150,000 house and sell for $250,000 you have $100,000 in capital gains; if you put $25,000 into remodeling the house, your capital gains are only $75,000.
The IRS is more likely to target certain types of filers than others, Worldwide Web Tax states. People earning more than $100,000, for example, are at higher risk of an audit, especially if they use tax shelters or they report particularly complicated investments. Anyone who claims more deductions than the IRS expects could draw an audit, even if the deductions are legal. Self-employed individuals are at more risk for an audit than employees; the IRS assumes it's easier to cheat if you run your own business.
The IRS has specific record-keeping recommendations for particular kinds of deductions. Anyone claiming a deduction for alimony, for instance, should keep a copy of their divorce agreement, as well as records for individual payments. IRA owners should hang on to the tax forms that record their contributions to the account. Anyone claiming gambling income or losses needs to keep information on the date, type and location of the gambling activity and who was there with them in addition to a record of how much they won or lost.
- IRS: Publication 552 -- Record Keeping for Individuals
- Bankrate: How Long to Keep Financial Records