Tax Records – The What, How, and How Long Should You Keep Them?
Now that your tax return is prepared, it’s time for some spring cleaning, but how long must you keep records before you can throw them out? It depends.
According to the IRS, you must keep the records needed to substantiate all your income and deductions available for inspection. You don’t have to spread them out on the coffee table in case someone from the IRS knocks your door. But upon reasonable notice from the IRS, you must be able to produce the records for an audit.
Except in the case of fraud, the IRS must audit your return within three years from the due date of the return or the date of filing, whichever is later. That statute is extended by three years if you misstated your income by 25% or more, and indefinitely if you file a fraudulent return, or no return at all.
Even if you filed your tax return on time and reported all your income, you should retain the following records for a longer period of time even though the statute of limitations has expired:
Prior Tax Returns – Keep copies of all tax returns you have filed in the past. These returns are helpful in preparing future tax returns, and they provide an interesting road map of your financial history that may be of interest to you down the road.
Payment of Taxes – Keep canceled checks that prove that you paid your taxes when due. The IRS records are not always what they should be, and sometimes they misplace your payment.
Basis of Property – Records relating to the cost of property and improvements to that property should be retained as long as you own that property or a replacement property. If you sold your residence, but deferred the tax on the gain by reinvesting in a new house under the old rules in effect before 1998, you will need to retain the records for both the new house and the old house.
How Should You Keep Your Tax Records
You should always keep a set of backup records safely away from the original set. To ease your pain, keep in mind that financial institutions provide documents and statements electronically via the internet and these documents can be downloaded to backup storage devices or burned to a CD.
One of the benefits of using TurboTax is your tax information is safely and securely stored so you can access it and transfer it to the next tax year. Although your tax information is saved when you complete your tax return, it is best to also save your tax return as a PDF file. This step can save you valuable time if you need to access information such as your adjusted gross income or if a copy is required to obtain a loan. In addition, if you use TurboTax Free edition, you need to save a PDF file.
TurboTax apps for your mobile or tablet device also will store your tax return, however you should back up your completed tax files for your records before deleting the apps.
Of course, if you want to keep all your records forever, there’s no rule against it if you have the room. We know many people who like to pore over old records, and seem to derive as much enjoyment from it as some of us do looking at old photographs.
But when the neighbors complain that your burgeoning collection of bank statements, checks and receipts are blowing out your windows and flying around the neighborhood, it’s time for some spring cleaning.