How Long Should You Keep Tax Returns?
It’s normal to keep stacks of paper piling up in your home and if you file your own tax returns, there can be a lot of paperwork involved depending on your business circumstances and assets.
Although it’s always a good idea to keep any necessary paperwork just in case you require it in the future, there has to be a time when enough is enough and something has to go.
It’s important that you don’t throw away something essential that you’ll need to prove your income in the future, so, how long should you keep your old tax returns?
How Long Should You Keep Your Tax Returns?
As a rule, you should try to keep your tax returns for a period spanning back a period of 3 years prior to your latest filing or latest due date to file, whichever is later.
The IRS may ask for proof of your returns, assuming there weren’t any complications with your return, for a period of 3 years after your last return as part of the Statute of Limitations.
However, there are situations where you may need to retain them for longer due to underpayments, late filings or to cover you for tax deductions on your assets.
It’s also essential to retain your tax documents for longer for other financial bodies. For example, certain insurance providers will require proof of 5 years of return to issue insurance, especially if this is for a business.
For this reason, 3 years is the minimum amount of time that you need to keep your old tax returns, but it’s always a good idea to wait a little longer if possible.
Why Is It So Important to Keep Your Tax Returns?
It’s essential that you keep your tax returns and any related paperwork because, under the IRS Statute of Limitations, you have a 3 year period after you’ve filed your tax return to claim any tax refunds that you’re entitled to.
This means that, if you miss something and realize that you might be due a refund further down the line, you can still claim your money back if you have all of the correct documents to hand.
If you have no way to prove that you are entitled to a refund, then you won’t be able to claim this back.
Similarly, the IRS has this same period of 3 years to issue any refunds to you. If you fail to receive a refund after this time, your paperwork will allow you to claim this from the IRS and allow them to rectify their mistake.
How Long Should You Keep Income Tax Returns and Are There Any Exceptions?
Although 3 years is the recommended time frame to keep hold of your tax returns, there are some situations where you may need to keep a record of your income for longer than this.
If you are coming up to retirement and have a retirement account such as an IRA, then it’s sensible to keep your documentation for up to 7 years after you file a tax return declaring your IRA or 7 years after the account is null. This covers you in case you need to prove your entitlement when you retire and need to withdraw funds.
- Bad Debt Deductions & Worthless Securities
If you have claimed a bad debt deduction or filed a claim for a worthless security, it’s also recommended that you cover yourself for 7 years after the tax return that first declared this. This will show any refunds you’re entitled to and provides accurate proof of any debts paid or set aside.
- Property Ownership
If you earn income from rental properties, it’s important that you keep all tax returns that declare any income received. These returns should be kept for the length of time that you own any properties as proof of extra income and deductions and should be retained for up to 3 years after the sale of the property.
If you own property under 1031 exchanges, you may need to keep your tax returns for even longer. As the exchange is on a non-taxable basis, your tax interest in the old property will remain the same as in the new one that you’ve taken over.
In these cases, you must keep your tax records for 3 years after the sale of the new property from the start of your ownership and also keep hold of your tax records for the older property before the 1031 exchange too for the same period.
What if I’m way behind on my U.S. tax returns?
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How Long Should You Keep Business Tax Returns?
If you are a business owner or a director in a company, it’s important that you keep any financial records for as long as possible to ensure you have proof of income for yourself and proof of payment to any employees. You will also have an accumulation of expenses, which may reduce the amount of tax you pay and it’s essential that you keep these records just in case the lower tax amount that you paid is questioned.
It’s recommended that for business tax returns, you keep your paperwork for a 5 year period, including mileage logs, expenses, outgoings and itemized deductions from previous tax filing.
How Long Should You Keep State Tax Returns?
Sometimes, the IRS has a little longer to process your taxes and audit your returns depending on the state you live in. For example, those people in California will need to retain their tax return documentation for 4 years, rather than the standard 3, just because the state of California allows the California Franchise Tax Board (CFTB) a little longer to audit.
The safest option, if you aren’t sure, is to keep your returns for as long as possible. However, if you’d like a little more information, it’s a great idea to speak to a professional who will understand the tax laws in your local area.
How To Store Your Old Tax Returns
You should ensure that you store all of your old tax return documents securely to ensure they remain safe and easy to find, should you require them.
One of the best options is a fireproof safe. It allows you to lock your secure documents away in a location that isn’t accessible to anyone else and will keep everything safe in the event of a fire, meaning that you don’t incur penalties for late filings or providing proof to the IRS if needed.
For documents that require longer-term storage, it may be a better option to scan the documents and add them to a hard drive or other storage device digitally. This keeps your documents secure and also declutters your home.
What Happens if You Fail to File a Tax Return?
Filing a tax return is mandatory and you must always file by April 18 for the previous tax year unless you’ve requested an extension for a valid reason.
If you fail to file a tax return or omit more than 25% of earnings on any tax return, then the statute of limitations’ normal 3 year review period does not apply. In this case, as you haven’t declared the entirety of your income, not only will you likely incur penalties, but the IRS has the right to review your tax returns for previous years at any time. For this reason, it’s sensible to keep your returns for a minimum of 6 years, provided that all of your following returns are correct and filed on time.
If you have previously had problems filing a return or have declared incorrectly, then it’s a good idea to keep all your tax return documents indefinitely. This is to show that you have since rectified the issue and have filed your taxes correctly.
If you are worried about filing your return correctly or are unsure which forms you need to use, then it’s an excellent idea to employ a professional service to help you. They can help you declare all your assets, avoiding fines and discuss the right way to file to benefit from deductions.
How to Dispose of Old Tax Returns
It’s important that you don’t just throw away your tax returns in the normal trash. You should shred any paper documents after removing any personal information with a marker. This ensures that your data is kept safe from prying eyes.
Most documents that you receive will be fully recyclable and it’s a good idea to take shredded paper to a recycling center to ensure your data is disposed of safely, rather than leaving it on the street to be collected.
How Long Should You Keep Tax Returns?
So, the answer to this question varies depending on your circumstances. Essentially the answer is between 3 and 7 years depending on whether you’re owed a refund, filed incorrectly previously or own businesses or assets.
If in doubt, it’s always best to save your returns for as long as you can to cover your back and allow for refund requests if you’re due them. However, if you are due a clear out and aren’t entirely sure what’s important and what isn’t, it’s a good idea to speak to a tax professional who can talk you through which documents may be relevant to your future.
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