While most people try to forget about taxes as soon as they file them for the year, you must keep tax documents stored properly in case you need them for a future IRS audit. Find out which copies of old tax returns you need to keep, why you are required to keep them and some storage options.
Tax returns are one of the most important and yet complicated financial documents that virtually every American citizen must complete. However, after your income taxes have been filed for the year, don’t just toss the paperwork. You must keep your old tax returns and the supporting information in case the Internal Revenue Service (IRS) selects you for an audit. Here are some guidelines on how to keep tax document copies, old tax returns and other important information.
What Tax Documents to Keep
First, keep a copy of your actual 1040, or other form that lists how much refund you received or how much you owed. This document is typically only two pages long but is a summary of all the other forms and schedules that you filled out.
In addition, attach any forms or schedules that you or your tax preparer used to complete the 1040 form. These documents track things such as self-employment income, rental income and a wide variety of others items. These forms, while not required by the IRS in an audit, will help you explain why certain deductions or credits were taken.
Finally, keep all supporting documentation, such as receipts, credit card bills, expense statements, 1099’s and employer W2 forms that shows money you made or deducted. These items are required by the IRS in case you are ever audited and without the receipts you may end up owing money.
Why to Keep Old Tax Returns
The main reason to keep old tax returns is to defend yourself if the IRS sends you a notice that they are auditing your tax return. An audit is the IRS informing you that they believe there is an error in your return. If an audit occurs, you are initially send a request by mail from the IRS asking that you send copies of all your tax documents. Later an in-person meeting with an auditor may occur where you will again need to present the information.
If you no longer have your documents, then the law sides with the IRS in case of a dispute on the tax return. Therefore, even if a deduction or credit was legitimate, you may end up paying if you no longer can prove it with the proper documents.
How Long to Keep Them
You are legally required to keep all of the above tax related information for three years after completing the return. After this time period, you can shred all of the paperwork and discard it. As a side note, the IRS can audit you for longer than three years after the return, but the obligation to prove wrongdoing is on the IRS after this time. One exception to the three year rule is if you claim a deduction writing off bad debt or securities. In these cases, keep the tax return for seven years.
If a tax return involves rental properly or the purchase or selling of property, keep them indefinitely. While not required in case of an audit, you will need them when you eventually sell the property to determine how much tax you owe from the sale.
Old tax returns and all of its supporting paperwork should be placed into separate folders and labeled with the year. Store the folders in a filing cabinet so they are easily found if needed. However, an even better option is to scan the paperwork and save them as electronic files on your computer. Name the computer folders by the year so you can easily find them. In addition, you may want to copy all of the folders to a removable flash drive or CD and store it in a bank box somewhere in case of fire.
Since collecting all of your receipt copies, old tax returns and other information is no fun to begin with, make sure you store it properly so you don’t have to do it all over again later. When properly stored, old tax returns take up very little space and provide a great peace of mind.