The Internal Revenue Service requires you to document the income or deductions you report on your individual or small business tax return. However, once you have used these tax records to complete your return, you may wonder whether you need to keep them and, if so, how long.
Why Should I Keep My Tax Records?
In most cases, tax returns are processed and accepted without issue. However, on occasion, the IRS will audit your return. Audits can occur shortly after a return is filed, or they can occur several years later. In addition, some people eventually notice that they have completed a tax return incorrectly. When this occurs, you can use your tax records to file an amended return.
Both audits and amended returns must be completed within a specific period after a tax return is filed. This is known as the "statute of limitations."
How Long Should I Keep My Tax Records?
You should keep all of the records needed to validate the information submitted on your tax return at least until the statute of limitations expires. Most taxpayers should keep the records that pertain to their tax returns for at least three years after the return is filed. However, certain types of records should be kept longer. Records that must be kept longer than three years include:
Records relating to unfiled returns or fraudulent returns - Keep indefinitely.
Records relating to tax years with unreported income that is more than 25 percent of the gross amount reported on your return. - Keep for at least six years from the time the return is filed.
Records relating to bad debt deductions or a loss from worthless securities. - Keep for at least seven years from the time the return is filed.
Employment tax records. - Keep for at least four years after the tax is paid or becomes due, whichever is later.
Records relating to a claim for a refund or credit that was filed after your tax return. - Keep for at least two years from the date you paid the tax or three years from the date you filed your original return, whichever is later.
Records relating to property you own. - Keep records related to owned property until the statute of limitations for the tax year in which you sold or otherwise disposed of the property expires.
A Word of Caution
Although you may never need your tax records after the statute of limitations has passed, there is always a chance that you will. However, keeping every document indefinitely seems impractical. To balance practicality with preparedness, PADGETT BUSINESS SERVICES® generally recommends keeping all records for at least seven years, regardless of the statute of limitations.
Do you have the support you need to manage your small business bookkeeping?
Contact us to schedule an appointment to speak with a local small business advisor.