Records you'll need to prepare your return
So to help prevent you from becoming the next Willie Nelson, let's take a look at what you'll need in terms of records, and how long you should keep these records.
The statute of limitations for federal income taxes is three years, so theoretically you can throw out a fair number of records three years after you've filed. But keep listening before you begin to clear out your files.
How long you should keep records
If you underreported your income by more than 25 percent, the statute of limitations increases to six years. And if you committed fraud or didn't file a return, there is no time limit.
Also, you should keep some records indefinitely. For example, if you bought your house or some mutual fund shares in a taxable account 10 years ago, you need to hold onto your original purchase records until you sell the asset to determine any capital gains or losses.
If you made contributions to a retirement account, you should keep those records, especially if you made after-tax contributions. But if you trade securities inside a retirement account, you don't have to keep records of all those trades because everything is taxed as ordinary income when you pull it out upon retirement.
You should keep copies of your filed returns forever, along with copies of your W-2 statements. Although you probably can clear out a lot of stuff that's over three years old, you should use some judgment.
When it comes to record keeping, it's obviously better to error on the side of safety. As many IRS agents have told me, the main reason why taxpayers get into trouble is that they don't have records to substantiate their claims.
Also, you'll want to file the right form at the right time and otherwise keep the IRS happy. You can get all the IRS tax forms you'd ever want by calling 1-800-TAX-FORM or by checking out the IRS' web site.
The IRS forms and instructions are fairly clear and informative, but they only tell you how to fill in the boxes and stay out of trouble. They won't give you strategies to help you cut your taxes. For that, you need sources like this tape.