How long should you retain tax materials?

Clients often ask how long tax-related documents should be retained. There are two IRS rules:
 The general rule is 3 years from the date of filing the return.
 The second, in the case of fraud, is 7 years from the date of filing.
However, there is another reason to retain certain documents after 3 or even 7 years:
if ever you have to prove the basis of an asset that you sell, such as your house, then you need to keep all documentation of purchase price and capital improvements for as long as you own that asset, in case you are ever audited.
This applies to any other asset that is not traded on an exchange, such as a work of art, and other objects that appreciate over time.
In the case of mutual funds and stocks, the fund or broker usually has the cost basis on record these days.