Imagine having this nightmare: The IRS suddenly audits you for a mistake you made on your tax return ten years ago. It seems you transposed two numbers and now you owe the federal government because you filled in a box with the number 730 instead of 370.
If this happened to you, what would you need to bring to an audit? Would you still have your documentation? How long should you actually keep your tax documents? Good question.
Let’s take a look at a few situations and the suggested length of time to hold onto your documents.
If you have been withholding taxes from your paycheck but find that you still owe additional taxes when you file, the rule of thumb is to keep these records for three years. There is one exception to this rule and that is if you do not report income that should have been reported at the time you filed your tax return. If the additional funds are more than 25% of the gross income you reported when you filed, those records should be kept for six years.
There are times when tax information should be kept indefinitely. This procedure needs to be followed if you file an inaccurate return, fraudulent return, or if there is no tax return filed at all. The reason these files should be kept indefinitely is because you will need to show proof of income when the IRS requests it, which could be at any point in time.
Special consideration is required if you have a small business. Employment tax records are important documents and require special handling. These records should be saved for at least four years from the date the tax is due, if paid on time. If the payment is late, the records need to be kept for four years after that date in order to verify employee incomes if requested.
Filing tax credits after filing your return can also add additional time to your record retention time. In order to determine how long you should keep the files, choose the latest date between when you filed your original return and when you actually paid the tax and keep the records for three years from whichever date is later.
When you file a claim for a loss from worthless securities or take a deduction for bad debt, you will need to keep the records for seven years. This allows the IRS ample time to investigate your claim. When filing a bad debt deduction, it’s imperative to hold onto the files and have adequate records to prove your bad debt claim.
The general rule of thumb is to keep your tax documents until the period ends when you are able to file a tax credit or refund, or, until the IRS closes your case file. In most cases, retaining records for about 4 years is adequate. There are some cases, however, that require tax documents be kept anywhere from three years to ‘indefinitely’ so check with your tax accountant before you discard any tax files.
The IRS is all about accuracy and proof, so make sure you keep impeccable records and retain all your records for the appropriate time frame. These steps will keep your finances safe and make tax time go a little more smoothly year after year.