It’s no secret that tax season is a stressful time for many Americans. From correctly reporting income, to determining what can lawfully be deducted, filling out tax forms can be a grueling process. Furthermore, tax season doesn’t necessarily end when you get your refund. Typically, you need to keep your records for a period of time after you file. Understanding how long to hold on to your tax documents is crucial to protecting yourself and your assets from the IRS.
How Long Should You Keep Your Tax Files For?
An important distinction to make is between your tax returns and other tax files and/or documents, such as supporting documents that prove your tax returns are accurate. Your tax returns should be kept indefinitely.
As for other tax files and/or documents, while most people understand the importance of keeping them, they may not know exactly how long they should retain them. According to the Internal Revenue Service, records should be retained until the period of limitations expires. The period of limitations refers to the time during which you can request an additional refund or when the IRS can levy additional taxes; it varies based on the type of action detailed in the document. In most cases, you should plan to save tax files for at least three years following the date of filing.
In some instances, it may be necessary to keep tax documents for a longer period of time. For example, the IRS advises that employers should keep employment tax records for four years. Individuals who report a loss from worthless securities should keep records for seven years, and those who neglect to report 25% or more of their income should keep files for six years. Additionally, individuals who filed a fraudulent return or failed to file a return should keep their tax records indefinitely. Records of retirement account contributions should also be kept permanently.
Employers should also take care to hold onto their tax files for the recommended length of time. Not only should business owners retain their employment tax records, but they should also keep benefits information for at least four years. This rule applies not only to large companies and corporations, but also to small businesses and even people who have household employees. When in doubt, err on the side of caution to make sure both you and your assets are protected.
For a quick recap, here are the major points. Save tax documents for:
- Three years: general rule for normal statute of limitations on most tax files and supporting documents.
- Four years: employment tax records.
- Six years: those who neglect to report 25% or more of their income.
- Seven years: when reporting a loss from worthless securities.
- Indefinitely: those who filed a fraudulent return or failed to file a return.
Remember that these are just the IRS requirements. It may be a good idea to keep any and all documents for future unforeseen events, such as lawsuits or insurance claims.
Which Tax Files Should You Keep?
If you’ve filed one or more tax returns in your lifetime, then you know how the stacks of documents can pile up. Understanding what documents you do and don’t need to save can help minimize your storage requirements while ensuring you and your family are protected over the coming years. According to a recent Forbes article, you should save not only your tax returns but also all supporting documents. These items may include forms like the W-2 and the 1099 as well as credit card statements, receipts, cancelled checks and even mileage statements. Additionally, you should hang on to any documents recording your charitable contributions and any stock records and dividend statements.
Protect Your Assets
Holding on to your tax records and all supporting documents is the best way to make sure your assets are protected in the coming years. However, being responsible about your financial future doesn’t mean you need to save every receipt and scrap of paper in shoeboxes. These days, you can digitize all of your important docs using a scanner or even your cell phone. With a few careful clicks, your tax history can fit neatly inside your laptop, leaving your home free from clutter.