As the urge to throw out all the clutter and get organized hits this new year, be sure that you’re saving your tax records for the proper amount of time before you toss out crucial documents. Receipts and W-2s from previous filings should be saved for 7 years from the date you filed the relevant return. You should keep your Form 1040 tax returns forever. That’s the safest bet in case of an audit. It is advisable to save both a digital and paper copy of Form 1040.
In case of an audit, it will do you the most good to keep tax records forever. In general though, most taxpayers need to keep their records for 3 years. For most cases, the IRS has 3 years to audit taxpayers, or to claim you owe additional taxes, and the taxpayer also has 3 years to claim more deductions. If you believe you overpaid your taxes within the 3 year window, you can file for a refund from the IRS for the over-payment. In the case that you do file for a change or the IRS notifies you of more taxes owed, keep the related tax records for an additional 2 years, for a total of 5 years. If the IRS believes you have under-reported your taxable income by more than 25% of the gross income that you reported, then you will need your tax records for 6 years. This is because the 3 year window is doubled to allow the IRS time to investigate. However if it is believed that you committed tax fraud, which is different than under-reporting, then there is no limitation to how long the IRS can audit. The 7 year limit is the maximum amount of time the ordinary taxpayer must keep their records for. If you write off lost money from the stock market or from a loan you extended that was never paid off, then you must specifically retain your records for 7 years based on the statute of limitations.
So then, it is safe to say that you should retain tax records for as long as possible in the case of an audit especially. For example, if the IRS cannot find a copy of your tax return and asks you to provide a copy, they will otherwise assume that you did not file taxes for that year, regardless of how long ago the taxes were filed. If you only save records for 3-7 years then you cannot prove that you filed the taxes; therefore, it is best practice to keep your tax return forever. The IRS bases statute of limitations on the claim, not the taxpayer.
When deciding what tax records to keep, start with the basics. Storing a print and digital copy of Form 1040 does not take up a lot of space and is the most basic way to prove you filed taxes. For the 3 year period after filing taxes when you are most likely to be audited, you should save all records used to prove the claims you made on your return. Keep income records (W-2, 1099 Forms, investment statements, Sales Receipts, etc.) and expense and deduction records (spending receipts, student loan statements, charitable donations, gambling or investment losses, invoices paid out, etc.) as well.
Take the time to understand the federal and state limitations for audits and record retention now so that you can protect yourself in the future if the need arises. We can help you decide what should stay and what should go as you prepare for a new year and the new tax season ahead, so give us a call today.