How Many Years of Taxes Should You Keep • Periods of Limitations

Keeping accurate financial records and retaining tax documents are crucial responsibilities for individuals and businesses. These records serve as economic history, providing a detailed account of income, expenses, and transactions that can be invaluable for various purposes, such as preparing tax returns, applying for loans, and planning for the future.

However, a common question many people ask is how long they should keep their tax documents. This confusion often arises because there are different types of taxes – such as income tax, employment tax, and excise taxes – and each type has another statute of limitations set by the Internal Revenue Service (IRS).

How Long Should You Keep Tax Records?

The “Period of Limitations” refers to the length of time you should keep your income tax returns, tax records, and all related documents. The duration varies depending on different situations:

• Claim for Credit or Refund: If you file a claim for a credit or refund after you file your return, you should keep your records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. This ensures you have the necessary documentation to support your claim.
• Employment Tax Records: If you have employees, keep all employment tax records for at least four years after the tax is due or paid, whichever is later. This is important in case there are questions about your employment tax obligations.
• Fraudulent Return: If you file a fraudulent return, you should also keep your records indefinitely. In fraud cases, there is no time limit for an IRS audit.
• Three-Year Rule: If none of the three situations explained below apply to you, you should keep your records for three years because it is the standard period for which the IRS can audit your return, assess additional tax, or for you to amend your return to claim a credit or refund.
• Claim for Loss: If you file a claim for a loss from worthless securities or a bad debt deduction, keep your records for seven years because these claims can be more complex and require additional scrutiny.
• Unreported Income: If you fail to report income taxes that you should say, more than 25% of the gross income shown on your return, you should keep your records for six years as the IRS has a more extended period to audit your return in these cases.
• No Return Filed: If you do not file a return, you should keep your records indefinitely because the IRS can assess tax anytime if you haven’t filed a return.

These are the minimum periods for which you should keep your records. However, it may be beneficial to keep them for longer, especially if they could be relevant to future tax returns or financial decisions.

The importance of tax records

Record-keeping is crucial for both individuals and businesses. These records serve as solid documentation of your income, deductions, and financial transactions, enabling you to effectively support your tax situation with the tax authorities.

Maintaining impeccable records goes beyond fulfilling tax obligations. It is also essential to pay taxes and, of course, to make informed financial decisions and strategically plan for your future. By clearly describing your income and expenses, you can identify opportunities to increase your savings, reduce costs, or invest more effectively.

Although unexpected, keeping detailed and organized records of your taxes can provide peace of mind during an IRS audit or examination. This way, you can have all the necessary information to support your position and prove to judges that you have complied with your tax duties. This can help speed up the audit process, avoid misunderstandings, and prevent possible penalties or fines.

Other reasons why it is important to keep your tax records

One of the benefits of demonstrating compliance with tax laws and establishing a solid foundation for your financial activities. This is particularly crucial in the complex world of taxation, where rules and regulations can change frequently.

By having a clear record of your financial transactions, you can quickly adapt to these changes and ensure that you fulfill any new tax obligations that may arise.

Lastly, keeping tax records can also be helpful when applying for a loan or proving your income for other purposes. Lenders often require proof of income, credit, and tax histories when considering loan applications.

Knowing how long to keep tax papers is vital for following financial rules and preparing for possible checks or questions. By maintaining records for the right amount of time and keeping them well, people and businesses can avoid problems and make sure their financial papers are tidy.

So, if you don’t think you can handle this alone, the best thing to do is to seek professional help, as they will be able to give you personalized advice so that you don’t miss anything and so that you can feel calmer and more relaxed knowing that you are doing things right.

Tips for Keeping Tax Records

We have already explained why keeping a tally and a history of all your taxes paid over the years is essential, individually or for your business. Now, we’ll give you some tips on how to keep these records so that this is not a worry to add to your life.

Keep Income Receipts

Keep receipts, such as W-2 and 1099 forms, and receipts for additional payments. These documents support the income reported on your tax return and may be needed in the event of an audit.

Document Deductions and Credits

Keep detailed records of all deductions and credits claimed. Keep receipts and invoices related to deductible expenses, such as charitable donations, medical fees, mortgage interest, etc. Making copies of any additional forms or documentation used to claim tax credits is also advisable.

Keep Investment Records

Keep records of purchases, sales, and dividends received if you invest in stocks, bonds, or other financial assets. These records are crucial for calculating capital gains or losses and meeting associated tax obligations.

Make Regular Backups

Back up your tax files regularly. You can store backups on external storage drives or use cloud backup services. This will protect your records from loss, theft, or physical damage.

Consult with a Tax Professional

It is always advisable to seek advice from a qualified tax professional. A tax expert can guide you on specific requirements and best tax filing practices and provide personalized guidance based on your financial situation.

Use Digital Technology

Leveraging digital record-keeping is using digital technology and tools to store, manage and organize financial records and related documents. Rather than relying exclusively on paper records, digital record-keeping offers a more efficient, secure, and convenient way to collect financial information.

Digital record-keeping involves scanning paper documents and creating files that can be stored on electronic devices such as computers, external hard drives, or cloud services. By doing this, records become easily accessible, physical space issues are eliminated, and the risks of document loss or damage are reduced.

In addition to simple scanning, digital record-keeping involves specialized software and document management tools. These solutions allow records to be organized into categories and subcategories, metadata to be added for easy searching, and backup and security systems to protect data integrity. This is a very (and actual) helpful tool.

References

• “How Long Should I Keep Records? | Internal Revenue Service.” Internal Revenue Service | An Official Website of the United States Government, https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records#:~:text=Keep%20records%20for%203%20years%20from%20the%20date%20you%20filed,securities%20or%20bad%20debt%20deduction.
• “Topic No. 305, Recordkeeping | Internal Revenue Service.” Internal Revenue Service | An Official Website of the United States Government, https://www.irs.gov/taxtopics/tc305.