Wondering how long you should keep tax documents in case of an audit? In most cases, you only need to keep things like receipts, non-profit letters, and other tax deduction proof for three years. There are some exceptions, of course.
When To Destroy Tax Records
Most of the exceptions to keeping your tax records for three years involve improper or illegal filings. For example, you have to keep records for income you do not report (you’re supposed to report all income), you have to keep records indefinitely if you don’t file a return at all, or if you file a fraudulent return. What is that all about, really?
The idea is that while you can destroy tax documents after three years if you file normally, you don’t get to use the three year rule as cover for improper filing. So, assuming that isn’t you, let’s move on.
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The other exception is that you must keep records for deducting worthless securities, or for a bad debt for seven years instead of the usual three, and employment records should be kept for four years.
The final exception is if you paid your taxes late, then you have to keep your documents for three years from when you filed, or two years from when you made final payment, whichever is later. This mostly applies to taxpayers who end up on payment plans for large tax bills. You basically have to keep your records longer if it takes you more than 12 months after filing to finish paying your taxes.
Tax Audits and Records
Now, just because you destroy your tax records doesn’t mean that the IRS can’t, or won’t, come asking about taxes older than three years, but here is the big difference.
During the three years, you are required to have supporting documents, or proof, of various tax situations, mainly for deductions you take. If, for whatever reason, you do not have those records during that first three years, then the IRS is allowed by law, to assume that the deduction is invalid because you do not have the documentation to prove it.
After those three years, however, the rules change. If you get audited in year four, for example, and you do not have a receipt or donation letter from a non-profit, the IRS must actually assume that you did have the proof and that your documentation was valid. But, there are two catches. If you (or your accountant — ALERT, ALERT!) DO STILL HAVE those documents, then you must provide them to the IRS, and the IRS can use those documents to validate — or invalidate — your deductions. So, it is to your advantage to not have them after year three.
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The other catch is that just because your proof is deemed to be valid, doesn’t necessarily make the deduction valid. For example, if you claimed your wife’s Valentine’s Day gift as a tax deduction four years ago and get audited, the IRS will assume that you did have a valid receipt for the gift. However, that doesn’t make the deduction valid, because receipt or no, you cannot deduct a gift to your spouse from your taxes.
Basically, the short, non-legal, way to understand your tax record storage requirements is that if you do not have your supporting documentation during the first three years, the IRS gets to assume you are lying. After three years, they have to assume you are telling the truth.
When To Shred Tax Returns
You don’t necessarily need to shred your returns after three years. Remember, the IRS already has those, so you gain nothing by destroying them. However, if they are starting to take up too much space in your filing cabinet, you can shred them anytime later than three years after your filed. Assuming you did not file late, or get an extension, then that would be after April 15th + four years past the date on the returns. Do not accidentally destroy your records early by forgetting that you must keep them for three years after the are FILED, not three years after the date on the top of the forms.
In other words, even though you only have to keep tax records three years, remember you file your taxes in the year following when you “earned” them. So, you file your 2017 taxes in 2018, therefore, you need to keep your records for the 2017 taxes until three years after 2018, not three years after 2017.
As always, this article is not legal or tax advice, and is for informational purposes only. Consult your tax professional for specific advice regarding your individual tax situation.