When it comes to your taxes, knowing what records to keep and what you can shred, should not be a guessing game. You may not want to have stacks of files that grow for 20 years or more, but there are other ways to manage the paper beast. You also do not want to end up not having the one document required to keep yourself out of jail. Fortunately, the IRS provides excellent guidelines that you can follow and stay safe.
First, understand that you need to keep more than just your actual tax records. Everything you use to prepare your taxes should be included in your files. For example, if you run a home business and claim a portion of your home repairs on your taxes, you need to keep the receipts for as long as the records are required, or longer. Items to include are:
In the majority of tax situations, the three-year rule applies. This is the normal statute of limitations for audits and revised returns. When it comes to determining years, this would be three years after the return was due. This date changes if you do file an amended return due to additional taxes owed. You must then keep your records for two years from the time the taxes are paid.
However, if for some reason you under report your income by more than 25 percent, the IRS can go back six years. Six years is also the minimum recommended for self-employed tax payers. Taxpayers that intentionally file fraudulent returns have no limitations benefits. The IRS can audit back as far as desired.
If you claim deductions for bad debts or security losses, keep the documentation for a minimum seven years. Amortization and depreciation documents must be retained for as long as you own the property being claimed. If you have domestic employees including a housekeeper or nanny, keep the records of the taxes paid for payroll for at least four years after the due date for payment.
Documents for distributions from an IRA should be maintained for seven years. You should really keep all your IRA contribution records permanently. This can prevent you from having to pay taxes twice. Records property sales should be kept for seven years, any home improvement receipts should be kept as well.
However, even with these guidelines, keeping your tax records and all of the documents you use to prepare your taxes permanently is really your best option. The IRS does allow records to be saved electronically (PDF). You can save years worth of records on a CD or Flash Drive. This can help you avoid becoming lost in a sea of paperwork while retaining all your records. If you are not sure about what to keep, and how long to keep it, it is always best to ask.