Once tax season ends, it’s tempting to think about pushing every document into a shredder and being on your way until next year. However, disposing of your tax documents prematurely can have financial consequences as the IRS may audit you up to three years later. Similarly, it is possible for taxpayers to claim the refund that they missed in the last three years. Generally, you should plan to keep all tax documents for at least three years in case you get audited. Here’s what to know.Thank you for reading this post, don't forget to subscribe!
If you’re looking for ways to reduce your tax liability, a financial advisor can point you to specific strategies to optimize your portfolio.
How long do you have to keep tax documents
The recommended period for keeping federal tax documents varies depending on the type of document and your circumstances. As a general guideline, it’s best to keep federal tax documents for at least three years. The maximum time for keeping tax documents is seven years, after which they will no longer serve the purpose of filing or receiving a refund.
The three-year deadline comes from the IRS, which advises taxpayers to keep W-2s, 1099s, invoices, donation receipts, property-related documents and investment documents within the federal statute of limitations.
This rule allows you to claim a refund that you received within the last three tax years. If you miss filing the return, you can submit the relevant forms and paperwork within three years from the filing date to get the return.
However, three exceptions may extend the three-year limit. First, the IRS has six years to audit your return to collect taxes on income you didn’t report or underreported. This situation may affect taxpayers with fluctuating income, such as business owners, self-employed contractors, and investors.
tax document example
Let’s say you made quarterly tax payments in 2021 that didn’t reflect your total income that year. If you underreported your income by more than 25%, the IRS can pursue unpaid taxes on this income for up to six years. As a result, it is important to keep your documents for such a long time.
Business owners have another set of documents to keep: employment tax records. If you have employees on payroll, you must retain all related files and paperwork for four years after the tax is due or paid, whichever is later.
Additionally, if you claim a deduction for losses from worthless securities or bad debts, documentation is required to be kept for seven years. Doing this ensures your ability to support these claims during an audit.
Finally, in some situations it becomes necessary to keep files forever. In particular, if you did not file a return for a particular year, have never filed taxes before, or experienced any issues related to tax fraud, you should keep your documents indefinitely because of the statute of limitations. has no endpoint.
How long do you need to keep state tax returns and documentation?
You may need to keep documents related to state taxes longer than those related to federal taxes because rules vary by region. For example, the statute of limitations for income taxes in Michigan is four years, while Montana has five years to contact taxpayers for additional information or audit the return.
Additionally, specific aspects of tax filing (such as fraud and unreported income) may have lengthy statutes. Therefore, it is important to review your state tax laws and have the relevant documents in accordance with your local limits. Working with a tax attorney can also help ensure you comply with state tax laws.
Why should you keep your tax documents?
Archiving your tax documents ensures compliance with tax laws, provides a record of your financial history, and provides protection in case of audits or disputes with tax authorities. It is a good practice to organize and retain these documents for a recommended period to meet any possible future needs. Here are seven common reasons to keep your tax documents:
- Income Records: Tax documents, such as W-2s and 1099s, provide a record of your income. These are important for accurately reporting your earnings to the IRS and referring back to them in case of an audit.
- Eligibility for deduction and credit: Supporting documents such as receipts, financial statements and expense reports help verify the deductions and credits claimed on your tax return. It is necessary to keep these records in case of audit.
- Proof of filing: Keeping a copy of your filed tax return is proof that you have complied with your tax obligations for a specific year. Because non-filing has serious financial implications, retaining evidence protects you from penalties and fines.
- Audit Security: The IRS may audit your tax return within a certain time frame (usually three years), and having the necessary documentation on hand can help you authenticate your income and deductions.
- Claiming a Refund: If you later find out that you are eligible for a refund or credit, the original documents will be required to file a revised return. You have three years to claim a refund at the federal level (state laws for refunds vary).
- Documentation for loans and financial transactions: Lenders may require tax returns as part of the documentation for mortgage applications or other loans. Tax documents are helpful in these situations.
- Objectives of property and inheritance: Tax documents may be needed for estate planning, inheritance, or other financial planning purposes.
What tax records should you keep?
When considering what tax records to keep, it’s worth paying attention to each document relevant to your tax situation. This way, you can confirm every detail about each tax year within the statute of limitations from the federal and state governments. Here is a list of nine tax records to keep:
- w 2s
- payroll document
- deposit slips
- Bills paid (such as medical expenses and property taxes)
- All financial documents related to running your business
- mileage log
- Documentation for the itemized deductions you plan to take
When to get rid of tax documents
While it may be tempting to dispose of the clutter and free up space in the filing cabinet, it’s important to wait until the statute of limitations has passed before getting rid of tax documents. So, when the statute of limitations passes beyond the reach of state and federal auditing (as summarized above), you can say goodbye to old tax documents. It is important to shred these documents to avoid the risk of identity theft.
Remember, other institutions may want you to keep your old tax documents. For example, lenders and insurance companies may ask for tax returns and financial statements older than three years. As a result, it’s best to consider what other purposes your old documents may serve before disposing of them.
Tips for Storing Tax Documents
Intact tax documents let you file your taxes correctly, apply for loans, and comply with audits. As a result, keeping them intact and legible is a top priority.
The ideal place to store your tax documents is a locked, fireproof safe. This way, your documents will be safe from theft and natural disasters. You can also store other personal documents there, like your mortgage documents, life insurance policies, estate planning documents, and property deeds.
Additionally, you can create electronic backups of these documents by scanning them to a cloud-based storage system. Various companies offer first-class encryption and cloud security for your documents. Doing this allows you to access your documents over the Internet and simplifies storage. Plus, you can file electronically with the IRS in many cases, eliminating the paperwork that typically accompanies tax season.
Understanding how long to keep tax documents is essential to maintaining compliance with tax laws and ensuring you have a record of your financial history. The recommended period ranges from three to seven years, and varies depending on the type of document and the statute of limitations of the IRS and your state government.
Tips for Keeping Tax Documents
- A financial advisor can help you maximize your refund and make sure you’re in compliance with tax rules. SmartAsset’s free tool isn’t difficult. SmartAsset’s free tool matches you with three verified financial advisors serving your area, and you can have a free introductory call with one of their advisors to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Tax season arrives, and the eternal question arises: should you file taxes yourself or hire a tax pro? Evaluating your financial circumstances can help you save time, money and stress.
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