As the income tax deadline approaches on July 15, 2020, you may be in the process of collecting documents to help you file your taxes. While it’s important to gather all required documents and receipts before filing, it’s equally important to save these tax records just in case of an audit. Due to the complicated nature of tax laws, it can be difficult to know which records you’re supposed to save and for how long. Below, we’re providing some guidance on which documents you should keep and what paperwork you can send to the shredder.
Which tax records should you keep?
The IRS recommends that you keep any records that “support an item of income, a deduction, or a credit” on your tax return. Those records may include, but are not limited to:
- personal and business receipts
- canceled checks
- medical bills and documentation of healthcare insurance
- property records
- receipts for any home improvement purchases
- outstanding loan documents
- previous income tax reports
Additionally, you will want to keep the following paperwork in a safe, water- and fire-proof environment:
- original estate plan documents
- disability insurance, long term care insurance, life insurance, and annuity policies
- birth certificates, marriage certificates, death certificates
- divorce documents
How long should you keep tax records?
The minimum guideline for holding onto tax records is three years, because the IRS has three years to audit and assess additional taxes once you file a return. This three-year window also applies if you file an amended return. It’s important to note that even if you file your tax return early, your file and timeline will follow the due date (generally April 15). So, for example, let’s say you filed your taxes on February 1, 2019, which was before the April 15, 2019 deadline. In general terms, the IRS will still have until April 15, 2022 to audit and assess additional taxes. While three years is a good rule of thumb, many financial and tax experts will recommend that you hold onto your personal tax documents for a total of seven years, just to be safe. Additionally, if you are a business owner, it is a good idea to keep any employment tax records for at for at least four years after your taxes are due.
What are some exceptions?
The IRS does have a few exceptions to their three-year recommendation, and most of these exceptions have to do with errors or omissions on your tax return. First, if more than 25% of your income is omitted from a tax return, the IRS can review up to six years of your returns. For the second exception, if you are filing a claim for an overpayment, you have seven years (from the date or the original tax return deadline) to make a claim for overpayment. Third, in cases of a fraudulent tax return, the IRS does not have any time limitations as to when they can examine your old tax records.
What documents can you discard?
If you’ve been organizing and decluttering during stay-at-home orders, you may have questions about which non-tax documents you can get rid of. The following items can safely be shredded:
- bank deposit and ATM receipts
- credit card bills
- monthly investment statements
- pay stubs
- receipts not related to itemized tax deductions
Have Additional Questions? Call Brian M. Douglas & Associates
If you have additional questions, you may want to reach out to a trusted attorney for help. Brian M. Douglas & Associates are happy to answer or direct your questions. Please call us at (770) 933-9009.