Most people are quick to toss their records aside with little consideration after filing taxes. Many don’t realize that 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 any 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.
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.
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