OK, we’ve got April 15th behind us and our tax returns are properly filed. What do we do with all those old income tax return copies and records that we have? The definitive answer is – it depends. The biggest fear is that as soon as you throw any of your records out, you will be required to provide them to the IRS. The good news is that there are certain protective rules that will guard you against an old assessment or an untimely audit by the IRS. These rules are known as the statute of limitations. The statute of limitations limits the number of years during which the IRS can audit your tax returns or require you to provide records. Once the statute of limitations expires for a certain year the IRS can’t go after you for additional taxes. Of course you can’t go after them for refunds either.
For audits and assessments the general rule is that there is a three year statute of limitations. The time runs from the date you file your return. If you file prior to the due date the time runs from the due date. For refund claims it’s the later of three years or two years from the date you paid the tax.
There are some exceptions to the statute of limitations. If you don’t report all of your income and the amount is understated by more than 25% of the amount shown on the return filed, the statute is extended to six years. If you claim a loss for a worthless security the time frame for identifying the loss is stretched to seven years during which you can claim the loss.
However, you can’t hide behind this protection if you are not following the rules. If you file a fraudulent return or fail to file at all the statute of limitations period never starts to run; the IRS can get you at any time.
There are other statute of limitation periods, too. For example, there is a ten year statute for collections of taxes assessed, and payroll tax returns have their own rule. For payroll tax returns the rule is three years from the April 15th of the year after they are due or the received date, whichever is later.
Property records included in your tax returns should be maintained for the statute of limitations period following the disposal of the asset for tax purposes. If there is an exchange of property that period would include the disposition of the exchanged property.
When it comes to records showing nondeductible IRA contributions you’ve made, you’ll want to keep them indefinitely. When you begin making IRA withdrawals in retirement, you’ll have them in case you need to prove that you’ve already paid tax on the money.
Keep your monthly retirement and savings account statements throughout the year until you receive your year-end statement. If your year-end statement matches the monthly statements, you can get rid of the monthly statements and simply keep the year-end version.
Also keep your records of stock and mutual fund purchases until you sell because you’ll need them to calculate your capital gain or loss.
What Can You Toss?
Even though there’s quite a bit of financial paperwork that you should keep, you don’t have to become a pack rat. So, you ask, “what does all that mean?” There are some things you can happily toss. For the average taxpayer seven years should be a sufficient holding period for keeping income tax records. In addition, you can get rid of your pay stubs each year after checking that they match what appears on your W-2. You can also purge credit card statements, utility bills, and phone bills after you’ve paid them and they don’t contain deductible expenses.
But, before you throw any records out, you should consider other needs such as insurance requirements or proof to creditors in addition to the IRS requirements. When you finally decide that you can get rid of those financial papers you no longer need, shred them – it’s the safest way to go.