After you’ve submitted your tax return to the Internal Revenue Service each year, the last thing you probably want to think about is how to keep your tax records. But making these arrangements is essential to protect yourself in the event of a future IRS audit.
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The general rule is to keep your tax records for three years, but there are several important exceptions where you may need to keep your tax records for a longer period of time as a taxpayer. Read on to find out how long to keep your tax records and when you can safely dispose of them.
Determination of the expiry of the limitation period
Typically, the IRS statute of limitations for verifying your tax return is typically three years. For an income tax return, the limitation period is three years. But the IRS says it’s wise to keep your tax returns even longer. For example, if the IRS audits you, you will have the documents you need to protect yourself from an audit. The limitation period begins to run on the later of the due date of your tax return or the date you file your taxes.
Special tax items
You will need to keep your records for seven years if you are claiming a deduction for worthless securities or bad debt. For example, if you loaned a friend $ 10,000 under a promissory note and that friend went bankrupt, keep records to prove that it was a legitimate debt released from bankruptcy that has never been paid.
Another particular tax element is the employment tax. Keep employment tax records for four years from the latest date between the date tax is due or the date you pay the tax.
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When your tax return includes information relating to the property, keep those documents until the statute of limitations – typically three years – expires for the year in which you sell or otherwise dispose of the property.
For example, if you bought a car in 2010, use it in your business and then sell it in 2020, you should keep all of those car-related tax records until the statute of limitations for your business expires. 2020 tax return.
Additionally, keep your old property records until the law expires for the tax year in which you dispose of the new property if you are exchanging the property for another property to which you transfer your base price.
For example, suppose you use an exchange 1031 to sell rental property and invest the proceeds tax-free in a new rental property. Your base in the new property depends on your base in the old rental property. Therefore, keep old records of rental properties until the law applies to the tax year in which you sell the replacement property.
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Other circumstances for extended limitation periods
In certain circumstances, the limitation period is longer than three years. For example, if you do not report the income you are required to report and it exceeds 25% of the income shown on that year’s tax return, the IRS has six years to verify your return.
Plus, failure to file or file a fraudulent tax return allows the IRS to audit you indefinitely. So keep all tax records for these years at all times.
How to store documents
You can keep your tax documents in a fireproof safe or in a bank safe. But to save space, consider scanning all your tax documents and saving them to an external hard drive or cloud service. As long as you can reproduce the documents and they are readable, the IRS accepts electronic copies.
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Ruth Sarreal contributed to the writing of this article.
Last updated: August 5, 2021
This article originally appeared on GOBankingRates.com: How Long to Keep Tax Records: Can You Ever Throw Them Out?