How Long Would Spock Say We Have to Keep Tax Records!

I can’t tell you how often I get asked this question? Usually my client is either moving and down-sizing, or they can’t get the car in the garage anymore. Either way they need to know what records they can toss.

If only there was one simple, straight forward answer. But like most of the tax code, there’s not. There’s always more to the story. So, follow along. I’ll do my best to keep it simple.

Keeping your tax documents and worksheets used to prepare your tax returns are critical if you ever get audited. What decides how long to hold onto those records is known as the IRS’s statute of limitations. I’ll go over those time limits below. But keep in mind this paperwork is also useful if you need to file an amended tax return if an error occurred or you forgot about a tax break you could have claimed.

Three years

Normally, the IRS has three years to audit you. They actually call it “examine” your tax return. That means you should keep your records for three years from the date you filed the original return. Usually April 15th. For instance, we just finished the 2017 tax season. Normally you would need to keep the 2017 tax records until April 15, 2021. Which is three years from the date of filing which was April 15, 2018. (2018 + 3 years for the 2017 tax year).

When claiming a refund via an amended tax return, the three years also applies. Or two years from the date the tax was paid, whichever is later.

Six years

The three-year audit period applies in standard filing circumstances. However, if you don’t include all your earnings on the original or amended tax return, the IRS gets a more time to audit, which means you must keep your records longer. The tax code says if you under-report your income by more than 25%, the statute of limitations is doubled: They now have six years to decide whether to audit you.

Seven years

In the case when you’ve written off “worthless stocks or investments.” You will need to hold those records for seven years. That same time frame applies to deductions for a bad debts you may have written off.

When to Keep Records Forever

There are a few times in which to keep tax records forever.

The most most serious is when someone has committed tax fraud. There is no statute of limitations when the IRS suspects tax fraud. So don’t do that…..lol.

Less obvious is the need to keep your records if you didn’t file a tax return. If for one reason or another you didn’t meet the income filing requirements, you would need to prove that to the IRS if they inquire about the missing tax year’s tax return.

Remember the statute of limitations (The standard three years) does not begin to run unless you actually file a tax return. I very often recommend my clients file tax returns every year even if they don’t have to, simply to get the statute of limitations in place.

I also recommend keeping complete copies of all your tax returns for all years. You can shred the supporting documents after the periods discussed above have passed, but keep the tax returns. They make good reference sources for writing you autobiographies…lol. They really don’t take up that much space.

What’s best way to keep your records?

OK, you’re possibly thinking, where am I gonna store all that paper. That’s not an issue.

The IRS does not require any unique record-keeping system for all taxpayers. You can maintain your documents in any type of fashion that works fine for you, as long as it allows you to produce the material when the IRS asks for it. For many taxpayers nowadays, that suggests digital files. The IRS now accepts digital reproductions of all your documents.

Scanning your tax returns and supporting docs (As well as other important paperwork) to a digital system can save you a lot of space (And headaches). All the IRS requires is that your electronic document storage fulfills the exact same requirements that relate to paper copies. Which means when you replace the paper with digital, you maintain the electronic storage systems just as long as for the paper hard copies discussed above.

I hope this answers your questions about how long to keep tax records. Now get to cleaning out the garage and move the car in….

Aloha,

Michael