Documents should be kept for varying amounts depending on the activity, expense, or event they record. There will be a paper trail of records once you file your taxes. You may be tempted to throw away all of that paperwork once you've finished up with the Internal Revenue Service (IRS). At the very least, you should save the tax returns and any related papers for three years from the later date you filed your return and the date it was due.
Everyone who is engaged in business is required to keep records. The reason why should you keep tax records is that your company will benefit greatly from the maintenance of accurate records. In order to generate factual financial statements, you need to keep detailed records. These are words of income (profit and loss) as well as balance sheets. These statements may be of assistance to you in negotiations with your bank or creditors and may also assist you in the management of your company.
When determining why should you keep tax records and for how long to store yours on hand, the following recommendations for keeping tax records should serve as a reference.
After filing your return, you have 3 years to amend it in order to receive a credit or refund. The statute of limitations established by the Internal Revenue Service permits the agency to query or audit a return during the allotted window of time. Your tax records will most likely be requested by the Internal Revenue Service (IRS) in the event that the agency has inquiries regarding your tax returns or intends to conduct an audit.
You should save any documents related to your taxes, not just the tax returns themselves. Your tax records may need to be kept for a longer period of time under certain conditions. A more intricate tax position will typically result in a holding period that is needed to be longer.
If you fail to report income that constitutes more than 25% of your gross income, the IRS mandates that you maintain your tax records for six years after you file your taxes.
If you have a short tax return, you are exempt from the requirement that you file it within the extended time frame. However, the Internal Revenue Service has six years to verify the records and levy additional tax if the return is complicated and purposefully understates the amount of income reported.
Keep the documents for a period of seven years if you are going to claim a capital loss on your tax return. Due to the extension of the record-keeping period, the Internal Revenue Service now has adequate time to investigate your claim and verify that the correct amount of tax was paid.
In addition to the information you'll need to retain for your tax return, you should keep detailed records of that capital loss.
Payments made to a foreign government may qualify for a tax credit or be deducted as an itemized expense for up to 10 years only after payment was made.
There are different time requirements for property owners to consider. First, you must keep the tax documents associated with a particular property for the term of your ownership. These records can be used to calculate depreciation, depletion deductions, and capital gains for a piece of property. After selling the property, you must maintain the records until the statute of limitations has expired.
However, there is a catch with nontaxable exchanges. Suppose you acquire property through a nontaxable interaction. The tax documents for both properties must be kept until the new property is sold or the statute of limitations expires.
The IRS states that you should only maintain tax records for more than 10 years if you have committed tax fraud or have failed to file a tax return. The IRS recommends keeping these documents if you have intentionally violated the tax code.
Check that you do not need to keep previous tax returns for other purposes before discarding them. For example, creditors and insurance providers may demand you preserve records longer than the IRS. If you choose to dispose of tax documents, you must shred them. Identity thieves adore tax returns because they contain sensitive data.
A fire-proof safe is the best place to keep hard copies of tax documents. You can maintain vital paperwork for your bank, brokerage accounts, and tax records. You should also inform someone else of the location of the safe's key. Therefore, in the event of an emergency, this individual will know how to access any documents they may need to maintain affairs in order.
If you want to maintain your records for a long time but don't want a lot of paper hanging around your home, you could scan them and store a copy on an encrypted hard drive or in the cloud. The IRS will accept digital copies of papers as long as they can be read.
The Internal Revenue Service provides detailed instructions on how long you are expected to retain your tax records. However, the advice of some authorities is to keep the tax returns for an even longer period of time than the IRS recommends.
If you follow the regulations of retention outlined by the IRS, you won't have to worry about anything in the end. If, on the other hand, you wish to keep those records for a longer period of time, it won't hurt to have copies of them on hand in case you ever need them.
