Guide to Keeping Tax Records

Most IRS deadlines are easy to discern, like the filing deadline or the due date to pay the estimated tax payments, but when it comes to tax records and how long to keep them, who knows?

The easy answer is, keep your tax records until the statute of limitations expires for that tax return. That includes storing receipts, canceled checks, and other documents that can prove to the IRS the deduction was legit!  Usually this is three years from the due date for the tax return or when the return was filed with the IRS, or two years from the date the tax was actually paid to the IRS, whichever is later. This is generally accepted as the time period in which the IRS can question your tax return.

BEWARE: There is no statute of limitations when a tax return is false or fraudulent or when no tax return is filed at all. This is where a lot of people get tripped up when the IRS knocks on the door five years later and all the paper work was thrown out after year three. Remember, it’s the IRS that will claim a return was false or fraudulent. Not filing speaks for its self.

You should keep some tax records indefinitely, such as tax records relating to property. Someday you will need those tax records to prove to the IRS the amount of gain or loss when the property is sold.

Here are some other statute of limitations provisions that you should consider:

• Retain documents verifying the value of real estate or stock until you sell them and realize a gain or loss, plus the three-year statute of limitations on the tax return filed after that sale with the IRS.
  
• Keep copies of your tax returns filed with the IRS indefinitely. Even though there is a three-year limitation for going back on a return, that does not apply if the IRS believes there was tax fraud. If you even suspect the IRS might consider something significant as fraudulent, keep the returns and all the documentation.  Something else to consider is that the IRS, without your knowledge, changes many returns. You just might need the original if the IRS records are different than yours.
  
• Retain your tax records relating to any claim with the IRS for a tax refund or tax credit that was based on bad debts or losses on worthless securities for at least seven years. You will probably need them at some point.
  
• Net operating loss (NOL) can be carried back two years and carried forward 20 years. It is very important for you to keep your tax records until all net operating losses are used to offset taxable income and the carry forward term expires. Add the three-year statute of limitations on the tax returns filed with the IRS that used the carry forward.
  
• Big one: The statute of limitations will be extended to six years IF the IRS finds that the gross income on your tax return was understated by more than 25%. Word of advice, if anything is EVER questioned on a return, keep that return and everything supporting it indefinitely.
  
• Further, in cases where a fraudulent tax return has been filed with the IRS, or no tax return has been filed with the IRS, assessment by the IRS may be made at any time.
  
• If you are an employer, you must keep all your employment tax records for at least four years after the tax is due or paid to the IRS, whichever is later.

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