How Long Should You Keep Tax Records?
This is one of the most common questions I receive, when people learn I work in tax law.
I understand the frustration. I get it. There are many opinions out there. The IRS tried to help, but unfortunately, their instructions may contribute to the confusion. In this post, I am going to try to help simplify the IRS guidelines and then provide you with an easier “Rule of Thumb” that I use with my clients.
To start, the IRS plainly states there is no concrete rule for your record retention policy. They say - It depends.
“The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.” https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records .
The image from the IRS website is reproduced in the below image for your reference.
But, what are the periods of limitations for the different situations, actions, expenses, and events, that you are suppose to record?
As you can gather from the “it depends” comment, there are a number of factors that need to be evaluated.
Originally, the IRS suggests 3 years. Then, they clarify that it is either 2 years from the date of making a tax payment, or 3 years from the date of filing the tax return. The choice depends upon the latest date that triggers the deadline. You have to use the date that occurs later in time.
Please understand, this suggested deadline for retaining tax documents is best applied for those of y’all that have a very simple financial situation. Possibly, an employee, with an approved tax deferred retirement plan, and a regular banking savings account and checking account. If you, however, you receive income, and for some reason forget to volunteer that information on your tax return, your tax record retention deadline extends to 6 years.
The silliness is, if you accidentally did not report income, how are you suppose to know if you forgot to report income? SURPRISE!!! The IRS may follow up with you in that 6 year window.
If you are a business owner, and pay yourself a wage, or you hire employees to work for you, you are subject to holding your employment tax records for 4 years. The IRS is extremely serious about collecting these taxes. This is one area you do not want to cut corners.
The tax retention expectation jumps to 7 years if you decide to loan a friend or family member some money, and they fail to repay it. (I think everyone has thIs happen to them at one point or another.) Well, you may be able to claim that as a loss on your tax return!!! If you do choose to claim that unpaid loan as bad debt, you also get to send that person a Form 1099, showing you forgave that debt and they have to count it as income. Now, you have to keep those records of that bad loan for at least 7 years. Or, what if you invest based upon a hot stock tip, and it turns out to be a bad deal? If you claim that worthless securities investment as a loss, y‘all are expected to hold those records on that investment for at least 7 years.
Once you decide to start getting proactive in your own financial well-being, involving additional investments, like investing in the stock market, real estate, art, cryptocurrency or other investment property, the IRS advises the record keeping deadlines begin at the date you sell those additional investments.
(The image for the following website is reproduced in the image below for your reference.https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records )
While this information is extremely helpful, and confusing, this is not the end of the discussion.
Did you know that there is another set of deadlines the IRS follows?
Tax laws give the IRS an initial 3 year window to review your taxes and assess a tax for you, if you made a mistake. That 3 year window is not set in stone and can be extended based upon your circumstances.
If the IRS assesses an additional tax, on your behalf, they have an additional 10 years to collect on that tax. Did you know that 10 year window can also be extended? (Based upon your individual circumstances, of course.)
(Additional content addressing IRS assessment and collection activities is too big to address in this post about recordkeeping.) The laws are reproduced below for your reference.
Remember, this 3 year deadline for assessment can be extended.
In addition, here is the law that addresses the 10 year deadline the IRS has in order to pursue collection activity, after they have assessed an additional tax. It is reproduced below for your refefence.
Understand, tax and financial decisions have a domino effect, they can impact you for years to come.
I realize keeping track of all the tax and financial records and deadlines can be very complex and confusing. So, I try to summarize it all for anyone who asks. I break it down into two main Rules of Thumb.
My two basic rules are as follows:
I hope this information has been insightfuloe and beneficial . If you have any questions, please let me know.
You may contact me through the contacts section below.