Tax Planning: How Long To Keep Tax Records & Returns

by Enid Kathambi, Finance Columnist


Published in Finance and Money on 31st January, 2020


The tax season is over; you have filed your returns, paid off your tax liability, probably received your tax refund, and squared everything with Uncle Sam. So, what to do with the pile of tax documentations on your table?

Should you throw them away? Are you supposed to keep these records? If yes, how long to keep tax records and returns?

The answer to this question can be a bit flimsy, depending on whom you ask. However, for your tax planning purposes, we are here to give you all the details about this burning question.

tax liability

Why you need to keep your tax records

You need to keep these records for any future purposes. For starters, the IRS does audits on filed taxes as a way of ensuring honesty by taxpayers.

This is one of the main reasons why people keep their tax records as the burden of proof solely lies on you. When the IRS comes knocking at your door to do their audit, you will need to provide a copy of your returns and any supporting documents.

What records should you keep?

According to IRS, the below are the records to keep:

Gross receipts

These are all the incomes that your business receives. Gross receipts will show the source of the money and the total amounts.

These include invoices, cash register tapes, receipt books, forms 1099-MISC, and deposit slips for both credit and cash sales.

Expense reports

These are all the costs your business incurs, excluding purchases. An ideal expense report should clearly show the type of expenses incurred, the amount, and that it was purely for the company and not personal use.

The reports to keep are petty cash slips, invoices, bank account and credit card statements, and cash register tapes.

Purchasing records

These are records that will show any items you bought for the business to resell or use as a material for your final products. Any purchasing record must clearly show the amount paid, and it was for purchases.

The documents to keep for this are invoices, credit card statements and receipts, bank account statements, canceled checks, and cash register tape receipts.

Assets

These are any properties that your business owns like machines, vehicles, furniture, and real estate. Apart from needing documentation on these assets to help verify your assets, you will also need it to compute depreciation.

assets

The documents to keep include sales and purchase invoices, closing statements for the real estate, bank account statements, and, or canceled checks. Also, these documents should clearly show:

The time of acquiring the assets and how you acquired it

  • The buying prices
  • Amount used for any improvements
  • Depreciation amounts
  • Deductions for casualty losses
  • How the asset is used
  • If disposed of, when and the disposal method
  • Selling price
  • Expenses incurred during the sale

Entertainment, travel, gift, and transport expense- in case you claim these deductions, this recent publication will guide you on what to keep.

For employed and self-employed individuals, you will need to keep any documents relating to your income, credit, and deduction you claimed. These records should be for at least 4 years. Documents to keep include:

  • The date of your employment
  • Identification number of your employer
  • Dates and amounts for any pension, wages, and annuity payments
  • Market value for any wages paid in kind
  • The amount for any tips in your returns
  • Copies of your filed returns
  • Copies of withholding tax certificates for your income (Forms W-4, W-4P, W-4S, and W-4V)
  • Acknowledgments for donations
  • Copies of Forms W-2
  • Receipts for expenses

How many years of taxes should you keep?

Whenever the IRS does audits, the burden of proof lies with you, meaning you need to provide all the necessary information that proves you filed the correct amounts.

According to the IRS, the period to keep the information will depend on the "event, action, or expense." The action and the event or timeline are critical since they impact the statute of limitations for the IRS. This means that they will affect any IRS's effort to demand any additional payments or your chance to amend your returns.

taxes

Generally, you should keep your tax records and returns for at least 3 to 7 years. On most occasions, IRS will audit returns for the past 3 years.

However, they can go back to more than 3 years, especially if your returns have complications. Below is more specific information on how many years of taxes to keep for particular situations:

  • If you have filed for a refund or claim - keep your tax records and returns for 2 from the day of paying the tax, or 3 years from the date of filing the original returns, or the later.
  • For any claims for a loss incurred from bad debt deductions or worthless securities, keep your tax records for 7 years.
  • If there is unreported income that is more than 25% of the gross income in your return, then you need to keep tax records for 6 years.
  • If you do not file your returns, you need to keep your records indefinitely.
  • In case you have filed fraudulent returns, you have to keep your records indefinitely.
  • If situation 3, 4, and 5 above do not apply to you, you can keep your records for 3 years.
  • For employment tax records, keep these for at least 4 years from the date that the tax was paid or fell due, or the later.
  • For real estate, the ideal time to keep your records is up to 7 years after the date of sale. The good news, the IRS can always provide copies of the last 6 years of your tax returns, in case you do not have them. All you need to do is fill out Form 4506 and mail to the IRS.

    However, you will have to part with $50 for every copy you request. Also, you will not receive these copies immediately, so you will need to be a bit patient. You can get your tax transcripts online for free for at least the last 3 years.

tax transcripts online

Now that you know how long to keep your tax records and returns, here is our final advice on how you can do this:

  • File your records in paper or box files. You can organize them per year or have separate files for each year.
  • Maintain a separate file for your real estate and long-term assets
  • Save your records on the drive, flash disc, hard disc, or CD-ROMs

References

https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records

https://www.pulselive.co.ke/bi/finance/how-long-to-keep-tax-records-according-to-the-irs/kh06c5g

https://www.investopedia.com/ask/answers/020414/how-long-should-i-keep-my-tax-records.asp

https://www.thebalance.com/how-long-to-keep-tax-returns-3973943

https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping

https://www.irs.gov/businesses/small-businesses-self-employed/employment-tax-recordkeeping

https://www.hrblock.com/tax-center/filing/personal-tax-planning/how-long-to-keep-tax-returns/

Choose A Free Gift Card From Our Prizes Section

Once you've earned enough points you can claim one of our many prizes.

free PSN codes
free PayPal money
free Steam Wallet codes
free Bitcoin
free Google Play codes
free Minecraft gift codes
free Robux
free V-Bucks
free iTunes gift card
free Amazon gift card codes
free XBOX Live Gold codes
free Clash of Clans gems
free Nintendo eShop codes
free Star Stable Lifetime Membership codes
free PS Plus codes
free Netflix codes
free Apple gift card
free IMVU credits