Financial records play an important role in handling financial issues. This is why you should make every effort to save and store financial documents such as that of your tax returns.
Yet after filing tax returns, most people tend to disregard this concern. The last thing on their mind is whether they might need these records in the future.
That said, your tax returns need to be saved for at least a few years. This gives you assurance in case you run into any possible issues with the Internal Revenue Service.
But outside of those few years, many people still question the considerable length of holding onto old returns.
Why do I have to save my tax returns at all?
People tend to think that after filing tax returns, there is little reason to store these records. But they don’t realize that at the barest minimum, tax returns help contradict possible issues that the IRS may hold against you. And in case that happens, you would want to be prepared.
If the IRS conducts an audit on your returns; not having any records will just work to your disadvantage.
The IRS has a total of three years to assess your returns. This starts on either the date you filed your return or on the date of the filing deadline, whichever comes last.
So if you promptly filed your returns in 2012 before the April 15, 2013 deadline, the IRS no longer has jurisdiction to audit your returns. This is because the three-year period of auditing has already passed.
Nonetheless, there are special exemptions which allow the IRS to audit your returns even after the auditing period.
The most common is if you reported an income that is at least 25% lower than your actual income. If this occurs, the IRS then has the authority to extend your auditing period to six years instead of three.
In addition, if you failed to file a return or if your return is proven falsified, the IRS has an unlimited authority with the auditing period.
The IRS will be able to audit you regardless of how much time has passed since the filing of the return.
Another possible reason for extension of the auditing period is when you file a claim on loss from worthless securities. If this occurs, the auditing period will be extended to seven years.
How long should I save tax returns apart from the audit period?
Though you are safe from the audit period perspective, saving your tax returns for an extended period of time can prove to be a vital decision.
One instance to consider is if you’ve purchased shares from a particular company or bought funds on certain occasions.
If you decide to sell those shares, you will need the return on which you claimed your capital gain or loss. This return will likely contain vital information that you’ll need in order to establish your basis for your future returns.
Without an original return to prove otherwise, you may be the object of scrutiny, especially as you have no means of proving your position.
Another is with regards to the benefits you are due to receive from Social Security upon your retirement. Part of the assessment that the Social Security Authority conducts is an investigation of your entire work history.
They will focus on the 35 years where you have had the highest earnings (inflation adjusted). If the SSA finds any red flags, your tax returns can verify any questionable information they raise. This will then translate to a key to getting all the benefits that you deserve.
Are there any other reasons for saving tax returns that I should be aware of?
Other reasons for keeping tax returns, apart from those discussed, include loan applications.
When applying for loans, your tax returns present a verifiable document that lenders can use. Your returns can particularly be a means of assessing the stability and reliability of your income.
This is especially true if you run a business or if you are a self-employed individual. This is because you won’t have access to W-2 forms that lenders can otherwise assess.
Your tax returns are a further way to easily establish the state of your finances for any given year.
By means of tracking your tax records over the years, you can find pertinent data that reflect trends in your earnings. This gives you a better insight for your future plans.
Your returns can establish a means of making informed decisions that affect how you handle your money.
Saving your tax returns may prove to be a hassle, but the motives on why you should do so outweigh these hassle issues.
So strive to keep your records clean with the IRS and learn how to get the most out of your financial records. These will, in time, help uplift the quality of your financial life. And you can achieve these by simply choosing to save and store those old returns.
Organizing My Financial Records
Save and store for less than a year
Store here your ATM records, deposit slips, and other credit card receipts that you need to track. Do this until you can account these records into your monthly statements. And unless you need these files to support your tax return, you can go ahead and dispose of these files. You may shred the documents or securely trash them to avoid any possible cases of identity theft.
Also store here your insurance policies and/or contracts that pertain to any investments. Keep them until new or updated ones arrive.
Save and store for a year or more
Store here any documents on any existing commitments that may take more than a year. An example of which are that of loans. Once you have paid or completed any of these commitments, you may dispose any necessary files. You can also save here any titles or proof of ownership. Examples are of vehicles or even stocks and bonds that you tend to hold on to but may sell in the future.
If you have any investment purchases, make sure to keep the documents here until you sell the investment. These will help you provide your basis for setting costs.
However, if such information is already accounted for in your annual statements, you can save those instead.
Save and store for at least seven years
If you underreport about 25% or more of your income in your tax returns, it is best to keep any tax documents or financial records for seven years. Keep all files whether in print or online to have all necessary files present in the case of any legal proceedings.
Save and store forever
Store here all vital and imperative records. Include here birth and death certificates, marriage licenses, court decrees or proceedings. Examples of which are in the cases of divorce or custody battles. Also store here all essential documents such as identification cards, social security cards. Finally, store here all other documents that should be saved for an indefinite period. Examples are military discharge papers, life insurance policies, and benefit plan documents among others.
You can also store here an account of your bank safe deposit boxes, granted that you have shared a copy with your attorney.
· Rule of thumb, keep all tax returns, along with supporting files. Do so until the auditing period for the tax returns have passed. Normally, this is three years from the date of filing. Or in other cases, three from the due date of filing of tax returns, whichever comes last.
· In the event that you have underreported your income by about 25%, you should keep all tax records for at least six years.
· If you have filed falsified tax returns or if you have failed to file your tax return, make sure you hold onto your records forever. The IRS will have unlimited jurisdiction over the auditing period that affects your records. If occurs, consider hiring a really good tax professional and a defense attorney.
· If you file claims for credits or refunds, make sure that you keep records for three years from the date you’ve filed your return. Or you can also keep records for two years from the date you’ve paid the tax, whichever comes last.
· Are you are part of a partnership or a shareholder in a certain corporation? If yes, keep note that auditing periods are based on the date of your individual tax return.
· If you filed an amended return, note that this will not affect the auditing period of your original return. The period will not restart. Although some exceptions may apply when you file within 60 days of the assessment period.
· Save and store all supporting documents, especially for the duration of the auditing period. Supporting documents include all financials such as your W-2 or 1099 forms. Plus, all receipts, bills, invoices, checks, payment orders, and other records. Make sure to include all documents that reflect the claims you have filed on your returns.
· Make sure to remember all Obamacare requirements. Keep all records that reflect your health insurance. Save those that prove that you are fit or competent to receive an exemption or a tax credit premium. Most importantly if you were required to reimburse such, starting with tax year 2014.
· Rule of thumb, always store and save IRA records. Store them until you are able to completely withdraw all of the money from the account. This includes Roth contributions. If you have ever made any nondeductible donations to a customary IRA, save all the records until you finalize a complete withdrawal. This is in order for you to avoid paying taxes on these twice.
· Save all records on any claims on depreciation, payments, or deductions. Do so for as long as you continue to take ownership of the property in relation to the claim. So keep files such as that of deeds, cost records, etc.
· Have you made any claims for special deductions? For instance–claims filed from worthless securities. If so, make sure to store and save your records for an extended period to even seven years.
· If you are an employer, all records on employment tax records should be saved. Keep them for at least four years after the date of filing of payroll taxes. Include W-2 and W-4 forms and other documents declaring pay information or benefit forms.
· Have you filed any special tax benefits claims? If yes, the rule of thumb is to save these records for as long as the tax benefits run. Then add three years for further safekeeping.
· Store all records if you own a property that might result to a foreseeable taxable event. Keep records up until the disposition of the property plus an additional of three years. This means that you should save all records that pertain to your property.
This includes records that reflect improvements on the property, for as long as the property is in your name.
Remember, you are entitled to exclude up to $250,000 on the gain of the sale of your property. And, if you file a claim as married couple, you are entitled to exclude up to $500,000 on the gain of the sale.