Every year after the tax day, clients inquire as to what tax documents they need to keep and for how long. Last tax season I wrote a blog post on the subject, inspired by a Forbes article by Tax Girl, Kelly Phillips Erb titled: “How Long Should You Keep Records after Tax Day?” I thought the information would be helpful for those who may be wondering what documents to hold on to.
The following are basic guidelines that both individuals and small businesses can follow so they can be prepared should they be asked to present their documents to the IRS.
The Forbes article suggests that taxpayers keep tax records and supporting documents for three years following the date of filing or due date of the tax return. This includes the following supporting documentation:
- W-2 and 1099 forms
- Invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment
- Bills, credit card and other receipts
- Other records to support deductions or credits you claim on your return
However, the following are the exception to the three year rule:
- Taxpayers who underreported more than 25% of their gross income need to keep those records for six years due to the extended statute of limitations. Important note: Under reporting is a huge big mistake that will create massive, unnecessary and expensive IRS tax problems. It’s always best to play it safe and report ALL income.
- Taxpayers who filed fraudulent returns or did not file at all must hold onto those tax records indefinitely. The statute of limitations never expires so it’s just always better and easier to file taxes properly.
Property deductions – For depreciation, amortization, or depletion, records should be kept for as long as the property is owned. Important documents to keep for no less than 7 years are: deeds, titles and cost basis records and if special credits and deductions that may have been claimed.
For Businesses with Employees - Keep all employee records including in-home employees for at least 4 years after the date the payroll taxes become due or paid. These records will be handy should you ever face an IRS business audit. Make sure to save the following: W-2 and W-4, and all related pay information including benefit forms.
Keep tax records organized and electronic – There is no need to scramble at the last minute. Organized and easily accessible record keeping is worth the effort if you have to present your tax documents. Saving your receipts ensures you have back up for justified deduction claims. Rule of thumb: when in doubt, save. According to Forbes, the IRS has accepted scanned receipts since 1997 but with the following conditions:
- That scanned records can be properly indexed, stored, preserved, retrieved, and reproduced should you need to produce a hard copy form.
- Scanned or electronic receipts are as accurate as the paper records
Check with your tax professional before getting rid of important records. The article suggests that if you get a green light from your CPA and your files are really, really old– shred them.
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