Best Practices: How Long Should You Keep Tax Information?

Best Practices: How Long Should You Keep Tax Information?

Have you ever wondered how long you should keep your tax information? It’s a common question that many individuals and businesses ask themselves. In this article, we’ll explore the best practices for keeping tax information, including how long you should keep different types of documents and the reasons behind it.

The General Rule of Thumb

The general rule of thumb is to keep tax information for at least three years. This includes all documents related to your taxes such as income statements, receipts, and payment records. The Internal Revenue Service (IRS) states that they have up to three years to audit your tax return after the initial due date.

However, it’s important to note that the IRS has up to six years to audit you if they suspect you have underreported your income by more than 25%. In addition, there is no statute of limitations if you have filed a fraudulent tax return or have not filed a tax return altogether.

Special Circumstances

There are special circumstances where you may need to keep tax information for longer periods. For example, if you own a property or assets, keep purchase and sale documents, along with improvement costs and receipts. This is because you’ll need this information to calculate your capital gains taxes when you sell the assets.

Similarly, if you own a business or work as a self-employed individual, you should keep tax information for a minimum of seven years. This includes all receipts, invoices, and other income and expense-related documents.

If you’re claiming a loss on your tax return, it’s important to keep your tax information for at least seven years. This allows you to prove that the loss was legitimate if the IRS decides to audit you.

Storage Methods

When it comes to storing your tax information, it’s important to be organized and keep everything in one place. Consider scanning all your documents and saving them electronically as a backup. Make sure to keep digital copies in a secure location with password protection.

Physical copies should be stored in a fireproof safe or a secure off-site storage facility. This is especially important for sensitive documents such as social security cards and birth certificates. You should never throw away any tax information that is no longer needed, but instead, shred it to protect against identity theft.

Conclusion

In conclusion, the best practice for keeping tax information is to keep it for at least three years. However, special circumstances such as owning assets or being self-employed may require you to keep records for longer periods. It’s important to be organized and keep all your documents in one place, both physically and digitally. By following these guidelines, you can ensure that you have all the information needed to file your taxes properly and protect yourself from IRS audits.

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