Published on 7/30/30
We’ve reached the end of the 2019 tax cycle, and we are sure most of you must have filed your tax returns by now. We understand how big a relief it is to complete filing your tax returns, but don’t be so overwhelmed that you discard your tax records, thinking you are done with them once and for all.
Yes, you heard it right!
You need to keep your current tax records and documents safe before you begin celebrating the end of the 2019 tax season. Let us tell you why you need to do so and for how long, to be ready for any unforeseen future requirements.
The Three Year Limitation
So, when we say essential tax documents, we are referring to materials like,
- A copy of your filed income tax return
- Other necessary Forms like the W-2s, 1099s, etc.
- Logs for mileage
- Documents that support your claimed tax deductions, refunds, or credits
- Financial statements that prove the income earned during the concerned tax cycle.
It is a rule made by the IRS that all U.S. taxpayers should keep all the documents mentioned above with them for at least three years from the date of filing the federal income tax returns. The same rule is applied to the IRS, wherein the federal agency is required to keep your tax records safe for three years from the date of filing. Therefore, for example, if you filed your federal income tax returns on April 15, 2020, this year then, you would be required to keep a copy of all the necessary documents safe with you till the 2023 tax cycle.
The reason for such a mandate is purely to benefit you and the IRS. Let us look at what you gain by keeping your tax records safe.
Advantages for the taxpayers
The primary benefit which can raise all your ears is that this is the time frame during which you can claim the tax refunds owed to you by the IRS. You don’t have to claim the eligible tax refunds the same year you file, or even if you miss filing them, you can always request them before the next three years. Therefore, if you have missed claiming a tax deduction or tax credit from your 2016 tax returns, this is your last chance to claim your money and get a tax refund.
Advantages for the IRS
The sole benefit to the IRS for keeping your tax records safe for the next three years is that they can refer back to them in case they need substantiation for what you claim on your federal income tax returns.
We suggest you be extra careful while dealing with your retirement accounṭs, and plan to keep your tax records safe for seven years from the date you entirely withdraw all cash from the account. The same is advisable if you are dealing with a bad debt deduction on securities that you labelled as worthless during tax filing.
Records dealing with property related matters, including stocks and equipment, should be kept safe for at least three years from the state you sell your property and claim it on your federal income tax returns.
Please note that if in case 25% of your income is reflected as omitted from your returns, then the IRS holds the right to impose required or missed taxes till the next six years. Therefore, if the situation complements your finances, we suggest you keep the records safe for at least six years.
Also, if in case, you filed a fraudulent return or forgot or refused to file federal income tax returns, then you shall keep on planning such records forever because the IRS has no statute of limitations in this particular case.
Disposal Procedure for relevant tax records
Some taxpayers decide to hold on to their tax records forever, and the boom in technology makes it very simple for them to keep all the data safe and in one place. It is very convenient to keep soft copies of all your tax records to future reference and avoid keeping hard copies. The only concern and point to highlight are that you should keep such data in software with high-security features. Also, we advise not to make a backup in devices that are always connected to the internet to safeguard your data against possible hacks.
But, if you choose to throw or discard them, then you should always prefer shredding all the crucial documents and separate the shredded material in different waste bins. Remember, tax fraudsters are still on the lookout for opportunities to dupe you and earn some black money.
The bottom line
Tax records are essential documents, just like your financial statements, Social Security Card, and things alike. It is always better to keep a copy of your filed tax records for future references. You might need it to substantiate the next return, or submit a forgotten tax refund, or know where you committed an error when the IRS asks you to re-file your returns. The possibilities of why you might need this data are many, and hence we suggest you keep them safe for at least six years in hardcopy or softcopy.