Five Tips to Protect Your Important Financial Records
Be Prepared in the Event of a Natural Disaster and Understand Your Responsibility for Retaining Records
With all the flooding that has occurred in Ohio over the past two months, now is probably a good time to review how you are storing and keeping your tax and financial records safe in case of a natural disaster and how long you need to retain these documents.
Below are five strategies that the IRS recommends to protect your important financial records.
1. Backup Records Electronically. Keep an extra set of electronic records in a safe place away from where you store the originals. You can use an external hard drive, CD or DVD to store the most important records. You can take these with you to keep your copies safe. You may want to store items such as bank statements, tax returns and insurance policies.
2. Document Valuables. Take pictures or videotape the contents of your home or place of business. These may help you prove the value of your lost items for insurance claims and casualty loss deductions. Publication 584, Casualty, Disaster and Theft Loss Workbook, can help you determine your loss if a disaster strikes.
3. Update Emergency Plans. Review your emergency plans every year. You may need to update them if your personal or business situation changes.
4. Get Copies of Tax Returns or Transcripts. Visit IRS.gov to get Form 4506, Request for Copy of Tax Return, to replace lost or destroyed tax returns. If you just need information from your return, you can order a transcript online.
5. Count on the IRS. The IRS has a Disaster Hotline to help people with tax issues after a disaster. Call the IRS at 1-866-562-5227 to speak with a specialist trained to handle disaster-related tax issues. You may also visit IRS.gov to get more information about IRS disaster assistance. Click on the “Disaster Relief” link in the lower left corner of the home page.
How long should you keep tax returns and records?
Financial records may have to be produced if the IRS or a state or local taxing authority was to audit your return or seek to assess or collect a tax. In addition, lenders, co-op boards or other private parties may require that you produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you.
We advise clients to keep returns indefinitely and retain the supporting records usually for six years. In general, except in cases of fraud or substantial understatements of income, the IRS can only assess tax for a year within three years after the return for that year was filed (or, if later, three years after the return was due).
For example, if your 2011 individual income tax return is filed by its original due date of April 15, 2012, the IRS will have until April 15, 2015, to assess a tax deficiency against you. If you file your return late, the IRS generally will have three years from the date you filed the return to assess a deficiency.
However, the three-year rule isn’t ironclad. The assessment period is extended to six years if more than 25 percent of gross income is omitted from a return. In addition, where no return was filed for a tax year, the IRS can assess tax at any time (even beyond three or six years). If the IRS claims that you never filed a return for a particular year, keeping a copy of the return will help you to prove that you did.
While it’s impossible to be completely sure that the IRS won’t at some point seek to assess tax, retaining tax returns indefinitely and important records for six years after the return is filed should, as a practical matter, be adequate. Since our firm filed your return electronically, we provided you with a paper copy of the return for your records.