Congratulations on completing your income (and possibly business) tax returns for the year. Before you throw away anything you used to put your filing together, here’s which tax records to keep and for how long.
Here’s why: The copy of the return will help you populate next year’s filing in addition to any amendment you might want to file concerning your latest submission.
Ready for Audits
As for the three-year suggestion for supporting documents, that’s what the IRS recommends because it’s the furthest back in time that you would need to worry about if you got audited.
However, the likelihood of an audit happenings has plunged as a result of IRS budget cuts — this is the first place the agency clips when funds get withdrawn.
But don’t let the reduced chances of being audited make you careless about recordkeeping because if you do get called for an audit, you’ll feel a world of pain if you haven’t kept the aforementioned documents.
Which Tax Records Should You Keep?
On top of that, audits aren’t the only thing you might need to retain these materials for, and these other reasons might necessitate holding on to the documents for periods that are different than three years.
- Hang onto supporting materials for two years after the date you file for a credit or refund of any tax previous year’s return — as well as the date you might pay for any taxes.
- For any year that you don’t file a tax return — because your taxable earnings fell between minimum thresholds, you need to retain all of your financial records indefinitely.
- The IRS also suggests that you keep records indefinitely for any year in which you filed a fraudulent tax return.
- You should also retain documentation of losses on securities or bad debt for up to seven years.
- For any filing in which you don’t report all of your income and it equals more than a quarter of your adjusted gross earnings, you’ll retain documentation of it for six years.
- Finally, you should keep employment tax records for at least four years after the tax becomes due or paid, whichever is later.
What Kind of Tax Records?
As for what kind of documents you need to hang on to — whether to prepare yourself for an audit, amending a return or teeing up next year’s return — the IRS says it’s receipts or anything that “support an item of income, deduction or credit shown on your tax return.”
You should also retain records that document your ownership of property for the entire period of time you are using the item — this will help you tabulate depreciation, amortization, depletion and any gain or loss on the item after you get rid of it.
This recordkeeping should include swaps of property that don’t involve any money changing hands — and you may need to have documentation of the old property as well as the new one.
Finally, even if you no longer have a tax reason to retain any records, you should double check to make sure there aren’t other business reasons to keep them. Insurance companies or creditors might want you to keep these kinds of records.
Tax Records Can Be Paper or Digital
As for how to retain the records, it doesn’t have to be a system of file folders and cabinets if you have limited space or dislike paper.
Get a printer with a scanner and you can capture electronic versions of any paper receipts and save them digitally.
Embrace online commerce to its fullest and you might find all of your receipts become fully digital — you might even be able to dedicate a folder in your email software for keeping these records.
And that leads to a great topic for discussion, fellow entrepreneurs: What do you use for recordkeeping — describe the systems you use, whether they’re analog, digital or a combination thereof?
Read More About Taxes
Learn more about taxes by checking out these stories from our archives and our sibling site, Saving Advice:
- Can You Fit a Home Office Deduction Into Your 2018 Tax Return?
- What’s the Last Day for Income and Business Taxes in 2018?
- Hire an Accountant as Soon as Possible
- Why You Need a Retirement Plan Now
- Restock on Business Supplies During a Sales Tax Holiday
- IRS Web Traffic Surges 23.9% — Beware of Last-Minute E-Filing!
- What Happens If You Don’t File Your Tax Return?
- What Are Post Office Hours on Tax Day 2018?
- This Tax Mistake Will Cost You a 50% Penalty
- Don’t Spend Your Tax Refund on These 7 Things
- Which States’ Taxpayers Are Getting the Best Refunds?
- How the Wealthy Avoid Taxes in 2018
- Dude, Where’s Your State Income Tax Refund?
- How Long Can You Postpone Your Taxes?
- Tax Withholding Calculator Debuts on IRS Website
- Beware of Fraudulent Tax Return Scams`
- Will There Be More IRS Audits Under the New Tax Law?
- When Do You Pay Taxes on Bitcoin and Other Cryptocurrency?
- What’s the Deal with the New Tax Law?
- Should You Prepay Property Taxes Now?
- Which Country Has the Highest Taxes?
Jackie Cohen is an award winning financial journalist turned turned financial advisor obsessed with climate change risk, data and business. Jackie holds a B.A. Degree from Macalester College and an M.A. in English from Claremont Graduate University.
