Money Essentials

Dealing with tax audits


The best way to minimize your chances of being questioned by the IRS is to file on time, attach all necessary schedules, fill out every form completely, and double-check your math before submitting your return, according to Frederick W. Daily, author of "Surviving an IRS Tax Audit."

Of course, you can't completely eliminate your chances.

To ensure that you're well prepared in the event that you are audited, maintain good records and receipt files. These include any forms and statements that show income or support deductions (W-2s, 1099s, canceled checks, receipts, etc.) as well as copies of your return.

Under the statute of limitations, the IRS has three years in which to audit a return, so keep your tax records for at least that long. The same goes if you filed a return but didn't pay the full balance owed.

But many experts recommend keeping your records for up to six years since that's the time limit the IRS has to come after you if you underreport your gross income by more than 25%; and your state may have longer time limits for audits.

It's worth noting, too, that if you don't file a return and you owe taxes or if you file a fraudulent return, the IRS can come after you at any time to claim what's due.

There are some records you should keep indefinitely for tax purposes. These include:

- Statements documenting retirement-account activities, especially records of your after-tax contributions so you don't get taxed on them again when you withdraw them.

- Records of your investments (what you own, what you paid, when there were splits and distributions), which are useful both in determining your tax basis when you sell and allowing your heirs to trace the origins of an investment if it's bequeathed to them.

- Home ownership papers, as well as receipts documenting home improvements, which will come in handy when you sell your home.

- Copies of old tax returns.

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