How Long Should I Maintain My Tax Records?
I am often asked, “how many years of records do I need to keep?” As a general rule, I advise clients to keep seven (7) years of tax records. Other records you may want to keep longer, for both tax and non-tax reasons. So, before you throw all of your tax documents up in the air to celebrate the passing of the 2017 Tax Season, put those documents and info in a safe and secure place.
The Three-Year and Six Year Limitations for the IRS to audit and assess more tax against you:
When we talk about tax documents, we’re talking about a signed copy of the return that you filed, along with W-2s, logs for mileage, 1099s, receipts for charity, receipts for unreimbursed business expenses, and any paperwork that supports your tax deductions or credits that you may have claimed on the return. This includes anything that you used to prove the state of your finances on your tax return. Put it in a folder(s) and store it in a file cabinet or a storage box.
Often with e-filing, tax return preparers do not require the taxpayer(s) to sign the actual return. Rather, an authorization to e-file is normally signed by the taxpayer(s) and the return is electronically “signed” and e-filed. It is good practice to review and sign a copy of the return that was e-filed for future reference or inquiries by a friendly IRS agent. Your tax attorney will appreciate that proper record-keeping as well.
So, the general rule states that the IRS can audit and assess additional tax up to three years from the date of filing (some states, like Arizona, have four (4) years to audit and assess). However, if you omit income (or state deductions that are disallowed by an IRS agent) that results in a tax deficiency in excess of 25% of the tax that you should have paid, the law allows the IRS to go back six (6) years from the date of filing.
If you are required to file, but do not file, a return at all, the law keeps that tax year open until a return is filed – either by the taxpayer(s) or the IRS may prepare a return for the taxpayer(s). If you file a fraudulent return, the statute also remains open until that tax year reporting is resolved.
The three-year time frame was put in place to benefit both you and the IRS. You can benefit from the 3-year timetable because you have a set amount of time to claim any tax refund that is owed to you. On the flip side, the IRS has three or six years to levy another tax if you made a mistake while reporting your income, depending on the degree of your “oversight.”
Other documents May Need to be Kept Longer
Some documents should be kept longer than seven years. For example, documents concerning a home purchase or business transaction should always be kept until the asset is disposed. You should also add the signed documents to that file supporting any additional capital investment that you do not write-off (“expense”) on your returns. These capital investments increase your cost basis in the asset, which you may have to prove-up in the future when you sell the asset. Such things like adding a new roof onto a structure or adding onto the structure itself. Other documents you should keep for seven years are stock account and retirement account documents. You should plan to keep your retirement account statements for seven years after the funds have been completely withdrawn. You should also hold on to your documentation that long if you claim a bad debt deduction or a loss on securities that you labeled as worthless.
