Staying Organized: What Tax Records Should You Keep?

Some taxpayers make the mistake of getting rid of their tax records as soon as they file. However, losing track of these records can create headaches in the future, especially if the IRS conducts an audit that requires access to these records.

On top of that, lenders may request prior year tax returns as part of the loan approval process. Keeping these tax returns, and making sure they’re easy to locate and access when you need them, is an important step in handling your taxes every year.

Curious which records you need to keep and for how long? Here’s a simple breakdown to help you out.

Personal Tax Returns and Supporting Documentation

Personal tax returns—as well as W-2s, 1099s, mortgage interest statements, tuition receipts, student loan payments, and other documentation used to complete the return—should be kept for at least three years. This time frame for keeping records is based on the amount of time you have to file an amendment to these returns, which is also three years.

After three years, it may be safe to get rid of these documents if desired. Keep in mind that with the transition to digital tax planning and filing, you may have digital copies of your tax returns dating back well beyond three years, including tax returns saved in a tax preparation software. This can make it easy to hold on to these records indefinitely should you want access to them in the future.

Related: Tax Planning: When Are Taxes Due? 

Employment Tax Records and Returns 

If you employ other individuals, whether as a sole proprietor or other type of incorporated business, your employment tax returns and records are subject to different rules than your personal tax records. At the federal level, the IRS requests that you hold onto these records for at least four years.

Make sure these records include comprehensive documentation covering not only wages, but also tips paid, identifying information for employees, employment dates, undeliverable documentation (such as W-2s and 1099s that were returned to the sender), the dates and amounts of tax deposits made, and other relevant documentation.

At the state level, these requirements and recommendations may vary. Contact your state’s department of revenue or your tax planner to find out how long these records should be retained to comply with state regulations.

When to Keep Tax Records Indefinitely

While most personal tax returns and support documentation can be dispensed with after three years, there are a few scenarios where these records may need to be held indefinitely. 

If you claim a loss from a bad debt deduction or worthless securities, for example, the IRS requests that you keep those records for seven years. Also,  if you don’t report income that equals at least 25 percent of your gross income, you’re asked to keep those records for six years—especially given the possibility of an audit concerning that unreported income.

In addition, the IRS encourages taxpayers to keep records indefinitely if they either file a fraudulent return or don’t file a tax return at all. Failing to file doesn’t mean you’re off scot-free, and there is no statute of limitations on when the IRS can investigate fraud. 

The simple solution is, of course, to make sure your taxes are prepared and filed legally every year. And, when in doubt, hold on to your records as a reference if disputes or questions come up in the future.

If tax preparation and tax record management are overwhelming to you, or if you struggle to keep this information organized after filing day, it may be beneficial to work with a professional tax preparer who can help you file your taxes correctly the first time and tell you how to save your records for the future.

To discover more tips and best practices for managing the filing and record-keeping of your taxes download the FSCB Tax Guide today.

Tax Planning 101 The Beginner's Guide for Individuals

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