With the growing number of taxpayers who own shares in mutual funds for investment purposes (not IRAs) it's especially important to carefully organize and retain the information received from each fund in which one participates.

The National Association of Enrolled Agents (NAEA) -- whose members are the only professional tax preparers licensed by the federal government to prepare taxes and represent taxpayers before all levels of the Internal Revenue Service -- offers mutual fund investors these recordkeeping tips for tax return preparation purposes:

• Mutual fund investors who've redeemed any or all of their shares are subject to capital gains rules -- even if they switch from one fund in a "family of funds" to another in the same family.
• Mutual fund shares owned one year or less and then sold create short-term gains (or losses), while shares owned longer than one year generate long-term gains (or losses).
• Statements for each fund should be organized separately. Enrolled Agents recommend using a three-ring binder for maintaining records received for each fund. If, however, all of a fund's yearly activity is provided in the year-end statement, these monthly statements can be discarded.
• If a fund's distributions are reinvested into the taxpayer's account at year-end, statements are especially important. Such distributions are reported as income in the year granted, but add to the cost basis of the fund shares.
• Taxpayers who sell mutual funds are allowed a choice of methods to determine their actual gains or losses: specific identification ... "FIFO" (first in-first out) ... and average basis. While many companies provide average cost basis, the FIFO method could be more advantageous. Consult a tax professional for help in determining the best method to use in a specific situation.

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