Once you’ve finished and filed your tax return to the Internal Revenue Service each year, the last thing you want to bother about is how you’re going to keep track of all of your tax documents. However, completing these preparations is critical if you want to be protected in the event of an IRS audit in the future.
The general guideline is to preserve your tax documents for three years, but there are a few crucial exceptions that you should be aware of if you are a taxpayer and need to maintain your tax records for a longer time.
Continue reading to find out how long you should retain your tax documents and when you may safely discard them.
Specifying Expiration of the Statute of Limitations
A tax return may be audited by the Internal Revenue Service only once every three years, according to IRS regulations. The statute of limitations for filing a federal income tax return is three years.
However, the Internal Revenue Service (IRS) advises keeping your tax returns for even longer periods. For example, if the Internal Revenue Service audits you, you’ll be prepared with the documentation you need to defend yourself against an audit.
The statute of limitations begins to run later than the due date for your tax return or the day you submit your tax return, whichever is later.
Unique Tax Things
If you want to claim a deduction for worthless securities or bad debts, you’ll need to retain your records for at least seven years.
In the case of a $10,000 promissory note issued to a friend who later went bankrupt, retain documents to demonstrate that the $10,000 was a real obligation discharged in bankruptcy that was never paid.
Employment taxes are yet another kind of specialized tax. Maintain records for employment taxes for four years from the day the tax is due or the date the tax is paid, whichever is later.
Records Connected To Property
When your tax return contains information about real estate, retain those documents until the statute of limitations — normally three years — for the year in which you sell or otherwise dispose of the real estate expires for the year in which you sell or otherwise dispose of the real estate.
In the case of a vehicle, for example, if you purchase it in 2010, utilize it in your company, and then sell it in 2020, you should maintain all of the tax documents associated with that automobile until the statute of limitations for your 2020 tax return ends.
Additionally, if you exchange property for another property to which you transfer your cost basis, maintain your old property documents until the statute of limitations on the tax year you dispose of the new property expires.
As an example, suppose you utilize a 1031 exchange to sell a rental property and reinvest the profits in a new rental property that is not subject to tax. Your basis in the new property is based on your basis in the previous rental property, which is a condition of the sale of the old rental property.
It would be best if you thus held onto the previous rental property documents until the statute of limitations expires during the fiscal year in which you sell the replacement property.
Other Possibilities for Comprehensive Statutes of Limitations
The statute of limitations may be more than three years, depending on the circumstances. Example: If you fail to record income that you are obligated to report, and that income exceeds 25 percent of the income reported on your tax return for that year, the IRS has six years to conduct an audit of your return.
Furthermore, failing to file a tax return or submitting a fake tax return gives the IRS the ability to audit you forever. As a result, retain any tax records from those years for the rest of your life.
How To Keep Documents
It is possible to store your tax papers in a fireproof safe or a safe deposit box at a bank.
However, if you want to save space, you might consider scanning all of your tax-related papers and storing them on an external hard drive or using a cloud service. The Internal Revenue Service accepts electronic copies of papers as long as they can be reproduced legibly.