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