Between 1988 and 1999, I made four nondeductible contributions to IRAs. I filed Form 8606 for all of these tax years, and I have documentation of my basis. In the years between 2001 and 2006, I partially reduced the basis, and I have documentation of those transactions. I have not reduced the basis since 2006. I plan on just keeping the tax returns for the years in which I have a Form 8606. Do I need to keep copies of all tax returns since 2006 to prove that I have not further reduced the basis? If so, can I just keep the first two pages of the 1040?
The IRS recommends that you retain tax records for three years generally, and for seven years if you file a claim for worthless securities or a bad debt deduction. There are other statutory limits if income is under-reported by 25 percent or more, if tax fraud is involved, or if a tax return was never filed. For something such as basis in an IRA, you should maintain a perpetual schedule showing additions to and subtractions from basis (best practices), or the most recently filed Form 8606 showing the basis remaining in the IRA. Saving a copy of older tax returns and supporting documentation if appropriate, in either paper or electronic format, is recommended but not required.
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Answered by: Alan M. Schapire, CPA, is a principal with Convergent Financial Strategies LLC in Wayne, Pa.