How Long Do You Keep Your Tax Records?

Taxpayers often ask how long they have to keep their tax records. Many taxpayers only keep records for three to six years. In Reyonoso v. Commissioner, T.C. Memo. 2016-185, the court considered a case that turned on whether the taxpayer could produce records to support that he had made a mark-to-market election nearly twenty years ago.

The facts and procedural history are as follows:

  • The taxpayer was a successful chiropractor.
  • He stopped filing Federal income tax returns in 1997.
  • He continued to submit claims to insurance to obtain payment for his services.
  • The insurance companies required that he provide his Taxpayer Identification Number on a Form W-9 to obtain payment.
  • The taxpayer used different Social Security and Taxpayer Identification Numbers on the Forms W-9 and to establish the bank accounts that he deposited the insurance checks into.
  • He then consolidated the monies into his brokerage accounts.
  • The taxpayer incurred significant losses each year by trading stocks in the brokerage accounts.

The taxpayer argued that he did not believe that he had to file income tax returns given his significant losses from trading stocks. Put another way, he argued that he thought his investment losses could offset his business earnings.

Tax Treatment of Stock Gains and Losses

Losses for investors and stock traders are capital in nature absent a mark-to-market election. Capital losses can generally only offset capital gains and then up to $3,000 of ordinary income, such was business earnings, each year. Excess capital losses carryforward and can be used in future years to offset capital gains or up to $3,000 of ordinary income.

The mark-to-market election is provided in Section 475(f). It provides an exception to the capital treatment of stock losses. The election requires that all gains and losses from securities be treated as ordinary in nature and all securities on hand at year end are deemed to be sold at the year end market value, thus recognizing unrealized gains and losses. Ordinary losses can offset other items of ordinary income, such as earnings from a business.

Making the Mark-to-Market Election

The Section 475(f) mark-to-market election is made by following the procedures in Rev. Proc. 99-17, 1999-1 C.B. 503. These rules were changed in 1999. For taxpayers who made the initial election, they had to (1) attach an election statement to either their timely filed return or extension request for the year preceding the year the election is first effective and (2) attach a completed Form 3115 Application for Change in Accounting Method to their return for the year of change. The election was effective for the tax year for which it was made and all subsequent tax years, unless revoked with the consent of the IRS.

As noted by the court, Reyonoso argued that he made a mark-to-market election in 1997. This was before Rev. Proc. 99-17 was issued and before there were formal mark-to-market election rules:

Revenue Procedure 99-17 didn’t come out until 1999. Before 1999 the IRS had no procedure for how to make a mark-to-market election. See Knish, T.C. Memo. 2006-268. To make an election for the 1997 tax year, as Dr. Reynoso insists he did, would have required a very sophisticated understanding of the Code. If it were the case that Dr. Reynoso had a sophisticated understanding of the Code, it would not be the case that he thought he didn’t have to file his tax returns for eight years in a row. See sec. 6012(a). Even after the IRS released the Revenue Procedure, Dr. Reynoso still couldn’t have made a mark-to-market election—he broke the rules when he didn’t file his tax returns. See Rev. Proc. 99-17, sec. 5.03. And in any case, we reiterate, there is no proof that he ever made such an election.

This raises the question as to how a taxpayer is to prove that he made a mark-to-market election nearly twenty years ago, when he did not keep a copy of his nearly 20 year old tax return or records. Even the IRS does not even keep most income tax returns or related records for this long.

In this case, there were several factors that indicated that the taxpayer acted in bad faith. This included keeping no business records whatsoever. So the court was able to sidestep the issue as to how a taxpayer is to prove that he had made a mark-to-market election in the past.

In reading the court case, one is wondering if the outcome would have been different if the taxpayer did not act in bad faith. Would it have been sufficient if the taxpayer had prepared and presented schedules to account for his stock trades on a mark-to-market basis? What if he had done so contemporaneously each year and documented the timing of the records in some fashion?


  1. How Long Do You Keep Your Tax Records? – Kreig Mitchell says:

    […] October 6, 2016 admin […]

  2. How Long Do You Keep Your Tax Records? – Empowered Tax LLC says:

    […] Read More: How Long Do You Keep Your Tax Records? […]

Leave a Comment:

Houston Tax Attorney Press
houston tax attorney | sitemap | terms | resources | contact us

IRS Tax Trouble
7500 San Felipe St.
Houston, Texas 77063
(713) 909-4906

New! Get Updates by Email!

Texas: Abilene, Addison, Alamo, Alamo Heights, Aledo, Alice, Allen, Alpine, Alvarado, Alvin, Amarillo, Andrews, Angleton, Anna, Aransas Pass, Arcola, Argyle, Arlington, Atascocita, Athens, Atlanta, Austin, Azle, Balch Springs, Barstow, Bastrop, Bay City, Baytown, Beaumont, Bedford, Bellaire, Benbrook, Big Lake, Big Spring, Bonham, Bowie, Brady, Bridgeport, Brownfield, Brownsville, Bryan, Buda, Canton, Carrizo Springs, Carrollton, Cedar Hill, Cedar Park, Channelview, Childress, Chillicothe, Cinco Ranch, Cisco, Cleburne, Clute, Cockrell Hill, Colleyville, College Station, Colorado City, Commerce, Copperas Cove, Corpus Christi, Corsicana, Crane, Crockett, Crowley, Dalhart, Dallas, Deer Park, Decatur, Del Rio, Denison, Denton, DeSoto, Dickinson, Eagle Mountain, Eagle Pass, Edinburg, El Campo, El Paso, Ennis, Fairfield, Falfurrias, Farmers Branch, Flower Mound, Forney, Fort Davis, Fort Stockton, Fort Worth, Fredericksburg, Freeport, Fresno, Frienswood, Frisco, Gainesville, Galveston, Georgetown, Glen Rose, Grand Prairie, Grandview, Grapevine, Haltom City, Harlingen, Highland Park, Highland Village, Hillsboro, Hitchcock, Hondo, Houston, Huntsville, Hurst, Hutchins, Irving, Itasca, Jacinto City, Jasper, Jersey Village, Johnson City, Joshua, Junction, Justin, Katy, Kemah, Kennedale, Kermit, Killeen, Kingsville, Krum, La Feria, Lake Dallas, Lake Jackson, La Marque, Lake Worth, Lamesa, La Porte, Laredo, Las Colonias, League City, Levelland, Lewisville, Lindale, Little Elm, Live Oak, Lockhart, Longview, Los Fresnos, Lubbock, Lufkin, Lumberton, McAllen, McKinney, Mansfield, Marfa, Marshall, Mesquite, Midland, Midlothian, Millsap, Mineral Wells, Mission, Missouri City, Monahans, Montgomery, Mount Pleasant, Nacogdoches, Navarro, Nederland, Navasota, Needville, New Braunfels, New Territory, Nocona, Northlake, North Richland Hills, Oak Grove, Odessa, Orange, Ozona, Palestine, Palmhurst, Palmview, Pampa, Pantego, Paris, Parker, Pasadena, Pearland, Pecos, Pelican Bay, Pflugerville, Pharr, Pilot Point, Pinehurst, Pittsburg, Plainview, Plano, Pleasanton, Port Aransas, Port Arthur, Portland, Port Lavaca, Post, Prairie View, Ranger, Rankin, Raymondville, Red Oak, Refugio, Rhome, Rice, Richardson, Richland, Richland Hills, Richmond, Rio Grande City, River Oaks, Riverside, Roanoke, Robstown, Rockport, Rockwall, Rosenburg, Round Rock, Rowlett, Royse City, Rusk, Saginaw, San Angelo, San Antonio, San Benito, Sanger, San Juan, San Marcos, Santa Fe, Schertz, Schulenburg, Seagoville, Sealy, Seguin, Shiner, Sienna Plantation, Simonton, Snyder, Sonora, Southlake, South Padre Island, Splendora, Spring, Springtown, Stafford, Stephenville, Sugarland, Sulphur Springs, Temple, Terrell, Texarkana, Texas City, Texhoma, The Woodlands, Three Rivers, Tomball, Trophy Club, Troy, Tyler, University Park, Uvalde, Victoria, Waco, Watauga, Waxahachie, Weatherford, Webster, Weslaco, West, Westlake, Whitesboro, White Settlement, Wichita Falls, Willis

© 2005-present all rights reserved

Not certified by the Texas Board of Legal Specialization.