Your taxes are filed, so you can now breathe a sigh of relief. Right?
Well, almost. After filing taxes, most people are quick to toss their records aside with little consideration. But it is just as important to file your tax records away properly as it is to file your return.
Keeping your tax records, including all documents and receipts, is critical in the event that you are ever audited. It is also vital if you ever need to file an amended return due to a mistake, or if you learn of a tax break you could have, but did not claim.
So, how long should you keep your tax records? Let’s take a look at the Internal Revenue Service’s (IRS) recommendations.
Typically, the IRS has three years to audit your return. In addition, you also have three years to claim a credit or refund from the IRS.
Keep in mind, the three-year requirement means three years from when you filed your return. In some circumstances, however, the IRS suggests holding onto your records even longer.
In regular filing circumstances, the three year audit period is enough. However, if you did not include all of your earnings, then the IRS gets a longer period to potentially audit your return.
According to the IRS, the statute of limitations doubles if you under-report your income by more than 25 percent. Meaning, if you under-report your income, the IRS now has six years instead of three to decide whether to audit you.
If that occurs, you need to produce tax records dating back to the last six years.
If you make a bad investment, you have the ability to file a claim for a loss from worthless securities. You can also file a claim for a bad debt deduction.
In either event, you need to hold onto your records for seven years. That is how long the IRS is allowed to question you about that specific situation.
The IRS recommends keeping tax records indefinitely in some situations, mostly with regards to tax fraud. Hopefully, you are never in that type of situation, but it is worth mentioning.
No statute of limitations exists for tax fraud audits. If the IRS suspects that some fraudulent data was entered on your return, they can audit you at any time, even if it was decades ago.
Further, if you did not file a tax return, you need to keep documentation of why you didn’t file it. That can be tricky since you obviously don’t have a tax return if you did not file taxes. However, the IRS requires you to prove you did not earn enough income to have to file taxes.
What Files Do You Need to Keep?
Now that you know how long you need to keep tax records, you may wonder what specific records you should keep.
In short, you should keep every tax return and the supporting forms you used to fill it out. That might include your W-2s, 1099s, mileage logs, expense tracking, alimony received or paid, K-1 forms, IRA contributions, and more.
Even once the statute of limitations has passed, it’s a good idea to keep a copy of your tax return for each year.
What are the IRS’ Recordkeeping Guidelines?
You can breathe a big sigh of relief. The IRS does not require you to keep a record of your taxes in any specific way. You can practice whatever form of recordkeeping works best for you. Just be sure that you can easily find all materials you may need in case the IRS ever asks.
If you prefer to keep hard copies of your tax records, the best way to store them is in a locked fireproof safe along with your other important documents.
On the other hand, if you prefer digital recordkeeping to physical files, there are no specific IRS guidelines that change with regards to recordkeeping. As long as digital copies are legible, the IRS will still accept them.
You will, however, want to make sure that you keep digital records on file until the statute of limitations is up. Also, take extra precaution to safeguard your information from hackers.
Keep in mind, both digital and hard files have their advantages and disadvantages. Be sure to store them securely. You may even consider storing your files both in a digital and hard copy.
Nowadays, recordkeeping has never been easier. With TaxAct, you can access prior year returns for free up to seven years. That makes digital recordkeeping easy.
Remember, though it may be tempting to throw all old tax records in a drawer once you have filed for the year, you can save yourself a whole lot of effort and headache by taking the time to properly file away your tax records. Plus, in the event that you are ever audited, you can then produce the required documents in a timely manner. By taking the time to organize yourself now, you are already one step ahead for next year’s taxes.
Okay, Can I Throw Out My Files Now?
Though most of us would love to get rid of the tax clutter in our desk, don’t forget that these files are very important and can help protect you in the event you are ever audited. Even after the statute of limitations has passed, look over each file before you toss it out.
You never know what file you may need in the future. Even the IRS recommends you hold onto files at your own discretion, as many creditors and insurance companies require you to hold onto records for longer than the IRS does.
Of course, when the time comes you are certain you can get rid of the files, be sure to shred and dispose of them securely. The last thing you want is your identity stolen from old tax records.
If you are uncertain about whether you can toss a specific file, you can always keep a digital copy to prevent it from cluttering up your home. It’s always better to hold onto something, as you never know what you may need.