How Long Should I Keep Tax Records?

How long should I keep tax records

After answering Uncle Sam’s demands and filing all of your tax documents by the April 15th deadline, you’re probably wondering what to do with all of your tax records. This is a common question that many people wonder because you never know when the IRS may come knocking at your door, asking for additional information. Before you try to live that minimalist lifestyle and declutter your home by throwing out all those stacks of paper, pause for a second. Some of your tax records should be kept for years, or even indefinitely, down the line.

So, get ready to clear up room in your filing cabinet and begin organizing. Below, we’ll go over how long you should keep your tax records and why.

Why do I need to keep my tax records?

Before we delve into what tax records you need to keep and for how long, it’s important to know why. From ancient Rome to Greece and Egypt and beyond, ancient tax collection has been ingrained in society for centuries. Without taxes, much of our public works projects wouldn’t be in existence, such as schools, highways, parks, and more. While it’s never fun seeing large chunks of our paychecks going to taxes, they are necessary.

That’s why tax collection is so serious and why the IRS does their best to make sure every American taxpayer pays into the system. The main reason people hold onto their tax records is in case the IRS were to ever audit them. If the IRS notices, or even suspects, any fraudulent tax activity, they will search you out and look for answers. Tax audits are stressful, expensive, and time-consuming.

So, to avoid receiving an audit from the IRS, it’s best to hold onto any form that’s related to taxes and your personal income. If you do receive an audit from the IRS, you can seek tax audit help from an audit representative at Community Tax. Our tax resolution services will create a payment plan and will aid you in complying  with all IRS regulations.

Tax records will come in handy for a variety of other non-tax reasons as well. For example, if you’re looking to apply for a credit card, the creditor may want proof of income to give you an appropriate spending limit. And if you’re looking to take out a loan, lenders will want proof of income to ensure you can pay the loan off.

What tax records should I keep?

Once tax season is over, the last thing you want to think about is taxes, which can lead you to throw everything in the garbage bin. Before you run those documents through the shredder, make sure you’re not destroying ones that you may need in the future in the event of an audit. Below, you’ll find various categories with important tax records you should hold onto.

Documents to Prove Your Income

If the IRS comes to audit you, they will most likely begin by searching for your proof of income. If the IRS notices any discrepancies between the income you reported and the income stated on your W2 Form and 1099 Forms, it will raise a red flag that can trigger a tax audit. To avoid any complications, make sure you hold onto these forms:

  • IRS Form W2: Your W2 Form is used by employers to document how much income, Medicare taxes, and Social Security taxes they withheld from you throughout the year. Your W2 Form allows you to report income, which will come in handy if the IRS is asking for proof.
  • IRS Form 1099-MISC: Form 1099-MISC is used to report miscellaneous income. If you are a freelancer, contractor, or earned money through gifts, prizes, rent, or other forms of income, it will be reported here.
  • IRS Form 1065 Schedule K-1: Schedule K-1 is used to report profits and losses, as well as credits and deductions, of your partner if you’re in a business partnership.
  • Bank Statements: You should organize and store all of your bank statements when you receive them. These will act as good proof of income and will show where your money was being spent.

Investment Records and Brokerage Statements: These records are used to show any capital gains or losses you made throughout the year through securities you purchased.

In 2017 196 million tax returns were filed and almost 1 million were audited

Documents to Prove Your Deductions and Expenses

One way to save money when filing taxes is by itemizing deductions. Tax deductions lower your annual taxable income, which means certain expenses you made throughout the year will be deducted. However, if you don’t provide accurate proof of these deductions, the IRS may come searching for you. For example, if you run a business and the IRS notices you’re deducting a lot of money for business lunches or events, they may become suspicious and ask for proof.

Here’s a list of documents you should hold onto to prove your deductions and annual expenses:

  • Expense receipts
  • Charitable contribution receipts
  • Losses from gambling
  • Proof of payment, such as a canceled check
  • Invoices
  • Mileage records
  • Transportation, entertainment, and travel records

A more comprehensive list of documents you should keep to prove your deductions can be found on the IRS website here. To ensure you accurately report all of your expenses and deductions, consider seeking help from tax preparation services. Tax preparation services can help you file Form 1040, Schedule A accurately and on time.

Documents to Prove Home Expenses and Retirement Account Contributions

Most home expense payments and retirement account contributions can also be deducted. Because of this, you will also need proof to show the IRS you’re not trying to scam them. Play it safe by holding onto these documents:

  • Retirement plan statements for 401(k) accounts and Roth IRA contributions stated on IRS Form 5498
  • Proof of payment for your home
  • Home insurance proof
  • Closing statement if you sold your home

How long should I keep tax records?

The IRS can go back up to 3 years when performing an audit but can add additional years if a substantial error was found

As you can tell, there are a lot of tax records that are important to keep. But how long do you need to store these? The answer varies. However, the IRS has a period of limitations that allows them to go back within the last three years from the date you filed your tax return. This time period will enable you to amend your return and make any corrections, as well as apply for deductions and tax credits you may have missed.

However, if the IRS finds a substantial error, they can go back even further, or indefinitely.

Tax records you should keep for 3 years

As previously mentioned, the IRS has 3 years to conduct an audit if they find any errors on your tax returns that raise a red flag. The documents you should hold onto are those that support your proof of income, credits and deductions you’ve claimed, and records relating to retirement contributions and college savings accounts.

Tax records you should keep for 6 years

The IRS can also audit you for any time within the past 6 years if they noticed you failed to report 25 percent of your income. For contractors, freelancers, or those who work multiple jobs and have to keep track of numerous 1099 Forms, this mistake can happen. So, if you’re juggling a variety of jobs, hold onto all of your 1099 Forms, any business expenses you deducted, and receipts as a form of proof.

Tax records you should keep for 7 years

If you ever made a bad investment that lost you a large sum of money, keep tax records for 7 years. The IRS has 7 years to audit you if you filed a claim for a bad debt deduction or had a loss from worthless securities, such as investing in stocks that plummeted.

Tax records you should keep indefinitely

Under certain circumstances, the IRS has an indefinite amount of time to audit you. One such case is if you never filed a tax return. If you never filed a tax return while making an income, the IRS can come knocking at your door even decades after you received your payments. So, keep copies of every pay stub, bank statement, and other proofs of income if you never filed a tax return.

Additionally, fraudulent tax returns can be audited indefinitely. If you lied on your tax return or even made a careless mistake that wasn’t corrected, the IRS can seek you out and demand payment.

How should I store my tax records?

With all of these documents floating around your house, you can easily get disorganized. One way to stay organized is by purchasing a filing cabinet with organization tabs to sort your documents by year and category, such as receipts, tax returns, bank statements. Another convenient way to organize your tax records is to digitize them and store them on a cloud-based platform. Doing so will ensure your important documents are never lost, stolen, or destroyed. And for important documents, such as your Social Security Number, wills, trusts, home purchases, and birth certificate, it’s best to store them in fire and waterproof safety boxes.

Key Takeaways on Keeping Your Tax Records

Taxes are one constant in life you can always bank on. While they’re a significant cause for headaches, especially during tax season, it’s important to keep them on file in case the IRS decides to conduct an audit. Bottom line: keep all tax records for at least 3 years, and for certain cases, save them for 6 or 7 years, or even for life.