How Long Should You Keep Your Tax Records?
If you're like most Americans, the day that you send off your tax returns is a major relief. But dropping off your tax return isn't the end of the story, because an audit is always possible. If that's the case, you'll need good documentation to prove your return's accuracy.
As most people have a very low risk of an audit, you might not think saving tax records is something that applies to you. But the IRS can always choose your return as one of their random audits for the year, and if they do, you'll need to prove that you kept accurate records and filed your return properly.
In general, the rule of thumb is that as long as the IRS can apply penalties to your return, you need to keep good tax records on hand. Here are a few situations that might apply as to how long you should keep your tax records!
Three Years After
This is the most common amount of time for the average person because most people aren't going to have any mistakes in their returns or any special situations that the IRS needs to examine. Not only is this the most common outcome, but it's also the lowest risk of an audit, because the fewer red flags your return triggers, the less likely the IRS is to take a second look.
It's still important to keep good tax records if this situation applies to you because you never know for sure if you're going to face an issue that the IRS catches that you overlooked. But in general, if yours falls in this category, you have little to worry about.
Four Years After
If you're a business owner, you should have documentation, but it's especially important to keep it for four years after filing to ensure that you've met all the requirements that apply to employment tax liabilities.
Six Years After
Think you might have made a major mistake with underreporting your income? This applies to your situation, as the IRS can review your return for up to six years if they think you've underreported by at least 25 percent. In general, as long as you were honest to the best of your ability, you shouldn't trigger this situation.
Seven Years After
In general, this may only apply to people who are claiming a loss because of bad debt or a bad investment. If you've claimed that your taxes should be lower because of this provision, you'll need to make sure you have documentation to prove your claim. Only make this claim if you're sure you have factual tax records to prove it, because this is far more likely than other situations to cause an audit.
Best Practices for all scenarios: Have solid factual tax records that can prove you've done the math right and can document your claims. Facts = Proof = No argument
If assistance is needed or even clarification, CORE Group is here to help! Please contact Core today to discuss any questions you may have. Especially, whether you should keep or dispose of those old returns!
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