Tax Records
There are two kinds of people in this world–those who save receipts and those who don’t. Even for the second type of person however, there is a tendency to hang on to tax paperwork for a very long time. There is a problem with this, even beyond the threat of being buried under an avalanche of medical receipts and donation records. In this day and age of identity theft, merely having your birthday on a scrap of paper can be dangerous, imagine what a thief could do if they got their hands on a tax return with your social security number, bank account number and other financial records.
The idea behind holding on to tax paperwork is to prepare yourself for an audit. If the IRS comes calling, nobody wants to come in for the mandatory meeting with no tax returns, receipts or supporting documentation. With that in mind, the real determining factor on how long to keep tax papers is how long after a return is filed that the IRS can, or is likely to, perform an audit. For most situations, the IRS has a period of limitations that amounts to three years in which they can look at your tax returns, meaning that you would need to keep three years of returns and documentation to support your case. There are, however, exceptions to this.
According to the IRS Publication 552 “Recordkeeping for Individuals”, you should hold your documents for six years if you believe you have under reported your income by 25 percent or more. If you have an irregular transaction, such as the sale of a property or the exercising of a stock option, especially for a business return, it’s a good idea to save the paperwork for six years because there is a greater chance of accidental under reporting. If you write off a stock as worthless, you should hold on to that tax return and supporting documentation for seven years.
Knowing that tax documents should be saved for three to seven years, it helps to know what constitutes a tax document. Tax returns, of course, should be saved, as well as W2, 1099 forms and other official tax forms. Receipts should be saved for three years on anything included in taxes, such as deductible expenses for work, medical expenses or tax preparation fees as well as itemized lists of donations. Anything related to under-reported income or unusual transactions such as investment tax reports or bills of sale should be saved for six years.
Once the time comes to dispose of tax documents, remember to destroy them thoroughly, preferably with a shredder. This will reduce the likelihood that anyone can gather information to steal your identity from your tax documents. Another problem that may arise is that you accidentally lose or destroy a tax document that you might need. In this case, you can get copies of returns, W-2′s and any attachments that you have already submitted to the IRS by filing form 4506, Request for Copy or Transcript of Tax Form. There is a fee involved if you have to take this course of action.
Sources: http://www.cbsnews.com/news/how-long-should-you-keep-tax-returns/
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