Tax Records: What to Keep, What to Toss–and How to Keep It
You may be ready to put taxes out of sight and mind for another year now that annual tax filing deadlines have come and gone and your returned processed—but don’t toss the documents you used to prepare them just yet.
Here’s a look at which tax records keep on hand and some simple tips to keep the documents organized, and secure.
Know the audit timelines
The IRS’ official statute of limitations for audits is three years after the date you filed the return—but that doesn’t mean you’re in the clear to toss records after that time. In truth, the timelines for how long to keep tax records vary significantly based on the kind of tax return you file, and the nature of the potential audit.
If the IRS finds that you owe tax because you didn’t appropriately report income earned, for example, the audit could ask that you supply tax documentation that goes back six years. If you own a business with employees, tax records pertaining to their employment must be kept for at least four years. If you claim a loss from a bad debt, records substantiating that claim should be kept for seven years.
With that in mind, remember that the Federal government isn’t the only entity that could perform an audit. (As Kiplinger reports, just .86% of all Federal tax returns filed in 2014 were audited). State tax agencies and municipalities conduct their own audits as well. Some matters, like a suspected underreporting of income, could require tax paperwork that goes back as many as ten years.
If you have retirement accounts and investments that could be subject to tax much further down the road but you’ve already paid it, keep documentation that ensures you aren’t taxed twice indefinitely. For example, records of Form 8606 can substantiate that you won’t owe tax on nondeductible contributions to a traditional IRA when you withdraw the money in retirement (because you’ve already paid the tax on it). Likewise, if you hold stocks and investments in taxable accounts and purchased them before 2011, you’re responsible for reporting (and potentially, documenting) the original price of the asset that will dictate the ultimate gains or losses you realize once you sell. (Brokers weren’t required to track and provide clients with that information until 2011, or 2012, in the case of ETF’s).
Clean out your tax folder.
If you compile your tax documents in a folder in preparation of tax filing and shove it in a drawer once you know your return was accepted, you’re probably keeping some paperwork you can trash.
Keep documents that substantiate any expense or income that was included in your return for at least as long as the timelines noted above. If you’re holding onto items that you thought might claim but didn’t (like medical bills that weren’t collectively high enough for an additional deduction and aren’t related to health spending our flex spending accounts), you can likely get rid of them.
Organize your documents.
Once you’ve cleaned out the clutter, organize your documents into three categories: Income, expenses, and investments. If you used electronic records to access some account statements from financial institutions and mortgage lenders, confirm how long they will be available for online access so you can print them off as PDF’s for your records, if needed.
Create a secure filing system.
Whether you choose to store your tax records virtually or physically in hard copy form, security is important. Experts recommend not storing tax records on your computer—even if it’s reserved for personal use. Instead, download the files to an external hard drive, or USB drive. (Because these aren’t connected to your computer, they’re less likely to be infected by malware, if your computer does at some point fall prey to it).
If you use an online tax preparation software, use strong passwords, and update them regularly. If you take advantage of mobile apps intended to ease recordkeeping, make sure that you wipe the device entirely once you’ve collected the information you need for tax filing, and store it elsewhere. You never know when a mobile device could be lost or stolen.