Importance of Proper Record Keeping

by Kenneth Hoffman in ,

It is not difficult to find professionals who advise, whether in person, on web sites, or otherwise, that tax records should be retained for three years. Some advisors suggest that tax returns should be kept for longer periods or even indefinitely, but that receipts and other supporting evidence can be shredded or trashed after three years. Too infrequently does the advice include a warning that receipts connected with basis determinations need to be kept for at least as long as the property is owned.

A recent Tax Court decision, Roberts v. Comr., T.C. Memo 2012-197, demonstrates the pitfalls of not retaining basis-related records. The taxpayer purchased a property in 1980 and sold it in 2005. The taxpayer testified that he paid $63,500 for the property and the IRS accepted this claim. The taxpayer also testified that he expended $75,000 for improvements to the property but offered no evidence other than what the court characterized as “vague self-serving testimony.” It’s very possible that the taxpayer made improvements of some amount, but because of the failure to retain and produce evidence, the taxpayer was taxed on gain that perhaps did not exist.

One of the interesting aspects of this case is that the taxpayer was an appellate lawyer. Worse, the taxpayer failed to file federal income tax returns for 2004 through 2007. Presumably the taxpayer attended law school. Perhaps the taxpayer took a basic tax course. Somewhere along the line the taxpayer should have learned about record retention, not only for tax purposes, but for other purposes as well.

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