Now that you have filed your tax returns, the hardest part is over. Now, you just need to organize your paperwork to avoid clutter and wait for the next tax season. And because you do not want to hoard your tax paperwork and other warranties, you may be tempted to trash your tax receipts. Don’t.
You will need the paperwork for you to file an insurance claim or justify the self-employed tax deductions you took. However, you are not required to keep more paperwork than necessary or keep it for longer than needed. You can save lots of time and money by knowing what to keep and what to toss away. You are probably asking, `How long should I hold on to these documents?’ Well, the answer to how long to keep tax receipts depends on a variety of factors. These include the type of taxes you are filing and the State you are in.
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Internal Revenue Service’s take on tax records
You don't want to be stuck in a situation where you receive an IRS tax audit and you have no receipts. The Internal Revenue Service recommends keeping tax returns and the paperwork supporting them for at least three years after you file the return. This is the amount of time that the IRS has to audit you. You are required to keep employment tax records for at least four years after the date when the 1099 taxes are due or paid, whichever is later.
Although there have been whispers that seven years is the ideal period for you to hold on to your tax records, you don’t have to keep records for seven years because there is a three-year statute of limitations.
However, there are exceptions to the periods of limitations that may warrant you keeping your returns for longer than three years. The statute of limitations goes up to six years if you have understated your income over the threshold of 25 percent of your gross income.
So, the IRS has six years to take any action against you.
The different states also require you to keep tax records for different periods. For example, in Ohio, you will have to hold on to your documents for a whole decade. However, most states ask you to keep them for a minimum of three years instead of six years, much as the federal government does.
What type of tax records should you keep?
You will need to keep all the records that support an item of income, gain or loss, as well as deductions until the period of limitation runs out for when the IRS conducts an audit. The period of limitation refers to the time during which the IRS can assess additional taxes or you can amend the tax return to claim a credit or refund.
There are no specific documents that you must keep, (as they are numerous), but any related documents that you will need to support your original tax return should be kept.
As a taxpayer, you will need to keep all the documents that prove your income. These include your 1099s, W-2s, and bank statements. Purchase and sales invoices, insurance records, closing statements, and all other documents that pertain to property should also be retained.
Forms 2439 and any 1099-B or 1099-INT tax documents from banks, brokerages, and other investment firms as well as other investment records and statements should also be kept.
Credit card statements are enough for the IRS. Invoices, and canceled checks should also be kept for itemized deductions. And if you are receiving unemployment benefits from the government on account of you losing your job, you need to keep your 1099-G form, detailing how much you have received.
If you own property and receive rental income each year you will need to keep the schedule E form. For rental property that you have sold, you must have all records of the sale as well as the records that show how much you have invested in the property over the years, and how much you deducted for depreciation. The same applies to when you sell your home. We recommend you use a tax receipt organizer to track your deductions and automatically store it for future access.
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The period of limitations to keep tax records
The IRS advises you to keep tax records for a minimum of three years. However, this three-year rule goes out the window the moment you do not report income that you should have reported. And if the income is 25 percent of the gross income shown on the return, then, you will need to keep your receipts for an additional three years. The same goes for if you do not file a return or if you file a fraudulent return.
If you have already filed your return and you want to claim a credit or refund, then you must keep tax records for three years or two years from the date of your last tax payment or whichever is later.
Tax records for rental properties
If you own rental property, you will be required to keep your tax records for seven years at least. These documents will help you track your rental income and expenses as well as serve as protection from landlord-tenant litigation.
Keeping these records will also back up the deductions or credits you claim on your federal tax return. Generally, the IRS can audit your tax return for up to seven years after you file although you do not have to worry about being audited after three years. But, that does not mean that you should throw away your tax receipts either.
On the contrary, you need to keep them because even though the deadline for an audit of a return has passed, you will still have crucial information relating to your assets that may help you with your future taxes. This is why we always recommend you use an online tax deduction tracker to safely organize and store your tax receipts.
American Bar Association's Recommendation for how long should you keep records
The American Bar Association urges you to keep records that potentially affect your tax returns for seven years. These include your landlord-tenant relationship.
You must include all the tenant applications and inquiries that provide information about prospective tenants as well as the signed lease agreements. All tenant applications should include all those that tenants withdrew or you rejected.
Although the current federal and state laws determine the length of time you need to keep tax documents, you get additional protection from lawsuits filed against you by previous tenants if you hold on to rental agreements past the expiration date of the statute of limitations.
You need to keep property records until such a time as the period of limitation expires for the year in which you dispose of the property in a taxable disposition.
Tax records for the claim of bad debt and worthless securities deductions
Generally, the rule for deducting losses on worthless investment securities is found in Sec. 165(g). This rule allows a loss deduction for a security that becomes worthless during the tax year, but only if the security, in the taxpayer’s hands, is a capital asset.
The statute of limitations for claiming or deduction of worthless securities or bad debt is 7 years. This limitation only applies to bad debt deduction and claim for a loss from worthless securities. After three years, the deduction of other claims on the return is closed. So, if you want to file a claim or write off bad debt, the IRS can go back up to 7 years.
How to store or keep your tax records and reports
You do not want to be stuck with drawers or boxes full of receipts. Your pile of papers needs to be organized to allow for proper storage. In that respect, we need to thank the powers that may be for the digital evolution. Everything is so much easier now.
There has been a gradual increase in applications to track receipts for taxes and accounting software that allows you to scan your receipts and store them electronically. Other apps allow you to take a picture of your receipts and it automatically converts it into a compatible document which it then stores for you. This is the magic that is technology.
And since electronic records contain the information that a paper receipt would show, they come in handy during an audit. As a bonus, you can store your tax records electronically for as long as you want even after the statute of limitation expires. For this, you will only need digital space which plenty of applications have.
Try Bonsai Tax's expense tracker for self-employed folks. We categorize, track and record all your tax receipts for the year as well as store the information in our database in case you get audited by the IRS.
The IRS On Fraudulent Tax Returns
Keeping all tax receipts is ideal unless it is a tedious chore, then keep the most relevant ones. As we have discussed, the IRS will usually not examine returns that are older than three years. They will only do so if they suspect fraudulently filed income tax returns.
Digital copies of your receipts are okay as long the information in them matches the one on physical receipts. However, you may be required to produce the original copies, so you must also store those. The smartest thing to do is have the documents converted into electronic files that can be stored on the cloud. This will de-clutter your space and keep you organized, ready for the next tax season.
The tax season brings out the organizer in us, and that is the best time to go through your documents and sort the ones you need to keep and the ones you can discard. Use a shredder when you discard tax documents that have sensitive information about you. This will save you from identity theft.
