How Long Should You Keep Your Tax Receipts?

Tax receipt is an evidence to the tax payer

Thanks to our federal government’s labyrinthine tax system, keeping accurate records becomes an art form that must be mastered.  With the shadow of the IRS lurking over your shoulder and the knowledge that you could be audited at any time, for any reason, you want to keep your financial house in the best possible order.

Of course, there comes a time where you ask, do I really need this stuff anymore?  How much is enough?  How long should you hold on to those older financial records?  Some people believe in keeping records dating back seven years (which coincidentally is the same amount of time that bad credit or bankruptcies remain on your record), others advise playing it safe and keeping everything forever.  Still, other schools of thought suggest that it isn’t worth wasting space on.  So how do you anticipate what the IRS will want and plan accordingly?

According to the IRS website, you should keep all of your financial and tax records indefinitely (read: forever).  This is especially important if you have filed fraudulent returns in the past.

There are various scenarios that determine how long you should hold onto tax related information.  Again, according to the IRS:

–          Keep all employment records for at least 4 years after the tax is due or paid, whichever is later

–          Keep records for 7 years if you file a claim for worthless securities or bad debt.

–          Keep records for 6 years if you fail to report income and it is more than 25% of your gross income shown on your return.

Tax by Phillip, on Flickr

If you are playing by the rules and filing honestly, then you should hold onto your documents for no less than seven years.  That way if you receive the stiff brown envelope in the mail with the news that you are being audited, you will know that you at least have seven years’ worth of verifiable records.  If you insist on keeping the bare minimum you can get away with, retain at least four years’ worth of records in accordance with the employer mandate.

Also keep copies of associated schedules and related documents, such as receipts. Also keep copies of W-2, 1099 and similar forms, as well as canceled checks that directly relate to entries on your tax return and medical bills.

And the notion that you are somehow magically protected from the IRS after three years is a fantasy.  In certain situations, the IRS can continue to investigate and collect taxes for up to six years.

The statute of limitations period extends to six years if a return includes a substantial understatement of income (defined as omitting income greater than 25% of the amount reported on the return). There is no statute of limitations if a taxpayer fails to file a tax return or commits fraud. A taxpayer is considered to have committed fraud if he/she submits a false return or if there is a willful attempt to evade tax.

Many times, in the event of an audit, people do not get in trouble for not saving records, but rather for saving the wrong ones.  Some of the records you may need to keep but may not think about include:

Birth and Death Certificates

Marriage and Divorce Papers

Adoption Papers

Military Service Records

Wills

Asset Lists — so your estate can be properly administered

Medical Records

Loan and Lease Agreements

Personal and Business Insurance Policies

Active Warranties and Service Contracts On Equipment

Employment Agreements

Pension Documents

Records of Pension Contributions and   Withdrawals

Pension Forms 5500 or 5500-EZ

The other thing I would recommend keeping in addition to your tax records is paychecks. Keep 12 months from your current employer, and then maybe your first and final one from past employers. These could be very useful if asked for employment references etc.

Basically, if you are an unorganized person, become organized now.  Even if it is only in this one area.  You don’t want to be caught unprepared if the IRS comes knocking.  You may not be able to mount your own defense, but there are professional outfits available for such purposes.  However, having what the IRS is looking for may spare you from having to hear any penalties announced with your name on them.

Source by BillyDRitchie

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