Suppose you get a letter from the IRS, asking for information about your taxable income from two years ago? Would you know where to find your tax documents, including your tax returns, W-2 forms, 1099 forms, and business-related receipts? Unfortunately, many people throw these valuable documents away too early, complicating their tax audit strategies.
In this article, the experienced tax professionals at S.H. Block Tax Services explain why you need to hang onto your records, where you should store them to keep them secure, and when to keep them longer.
Hang Onto Your Taxes: 4 Reasons Why You Need to Keep All Your Tax Records
According to the IRS, not only do you need to keep your tax returns, but you should also save any records that support an item of income, deduction, or credit shown on your return. The minimum amount of time you need to keep these records is three years, which is the period of limitations for most tax returns. The period of limitations is how long you have to modify your tax return to claim a credit or refund—and the period in which the IRS can assess additional tax.
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1. IRS Audits
As we mentioned above, the IRS can audit your tax returns for a certain period. If the IRS conducts an audit and you don’t have documentation to back up your tax claims, it can be extremely difficult to prove that the agency made a mistake.
A tax attorney may be able to help you counter inaccurate IRS findings without copies of your tax records, but it will be considerably more difficult. This is why keeping your tax records for at least the period of limitations is crucial.
2. Mortgages and Major Loans
Sometimes, lenders will require tax-related documents such as tax returns and W-2s as proof of income for mortgages and other major loans. Typically, the lender will request the last two years of your tax returns directly from the IRS, and all you’ll have to do is fill out a Form 4056-T for authorization. But you should have your own copy of the records to ensure that everything is accurate.
3. FAFSA and Financial Aid
Have a grad heading to college? If you’re thinking of applying for federal student aid by filing a FAFSA (Free Application for Federal Student Aid), you’ll need the last two years of tax returns and W-2s to determine you or your child’s eligibility.
4. Tax Return Amendments and Future Reference
You typically have three years to amend an issue on your tax returns, which means you’ll want to keep those records for at least that long.
Retaining your tax returns can also simplify your next filing. For many taxpayers, their income and taxes change very little from year to year. In these cases, you can use past income tax returns as a template for your current one. Other times, you might have an atypical consideration on your tax return, and keeping it as an example of how to handle the issue could be useful if you have that same issue in future years.
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Where to Store Your Tax Returns and Other Important Records
Now you know why you need to save your tax records, but what’s the best way to do it? Depending on your unique tax circumstances, you might have a lot of important documents to save. And these records have sensitive information that can greatly inconvenience you if lost or stolen. Protect your tax records by storing them in fireproof safes or secure electronic locations.
Fireproof safes don’t have to be fancy hidden safes like you see on TV, hidden behind landscape paintings. A fireproof safe can be an actual safe or simply a fireproof box that locks with a key. Either way, they should be a least moderately hidden. The point of a safe is to secure your records from both natural damage, like fires and floods, and the average burglar. For extra security, you can keep the original copies in a safe in your home and have another copy either in a safety deposit bank or stored electronically.
Password Protected Hard Drives
Electronically storing important tax records can be a great way to save space and sort through files with ease when you need to access something. However, simply scanning papers and saving them into your Documents folder isn’t secure. You should save tax returns and other sensitive data onto a password-protected external hard drive or flash drive. If you choose to store your electronic copies on a cloud service like Google Drive or Dropbox, make sure you have a secure password and set up two-factor authentication to protect your information.
When to Discard Your Tax Records: Questions to Ask Before You Hit “Shred”
First, yes, you should shred your tax records once you are sure that you no longer need to hold onto them. As we mentioned earlier, tax records include a lot of very sensitive information and should be shredded to protect your privacy and guard against tax fraud schemes and identity theft. But how do you decide when it’s time to shred them? Ask yourself these questions before you hit “shred.”
Do I Have Any Unique Circumstances That Affect My Tax Records?
Your unique tax circumstances affect how long you need to hold onto your returns, as does the period of limitations for various tax-related issues. Below are some guidelines to help you determine how long you should keep your tax records.
- 3 Years: Typical tax returns
- 4 Years: Employment tax records
- 6 Years: Tax returns if you did not report more than 25% of the gross income you should have reported
- 7 Years: Tax returns if you filed a claim for a loss from worthless securities or bad deductions.
- Indefinitely: Tax returns if you did not file a return or filed fraudulently
If you’re unsure how long you need to retain a specific tax document, contact the professionals at S.H. Block Tax Services.
Are the Records Connected to Property?
There are some other exceptions to the guidelines above, which is why you should speak with a tax attorney before you destroy important tax documents. For example, if the tax records relate to the buying or selling of property, you should keep your records until the period of limitations expires for the year you sell the property.
Are There Other Reasons to Keep My Tax Records?
The last question you should ask yourself before you shred your tax documents is whether there is any other reason to keep those records around. Sometimes insurance companies or creditors may require you to keep tax records even after the IRS says you no longer need them.
S.H. Block Tax Services | Reliable & Effective Tax Problem Resolution
If you have all your tax documentation but need help putting together a case against an IRS claim or action, S.H. Block Tax Services may be able to help. Didn’t keep your tax returns? We might be able to assist you in acquiring copies of your returns for future use or for resolving a current issue. Contact us today to learn how we can help. Call us today at (410) 793-1231 or contact us online for your free, no-obligation tax consultation.
How Long Should I Keep My Records? (2019, May). Internal Revenue Service. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.