How Long Do I Have to Keep These Stupid Tax Records?

Things are still slow here in the office!  I thought I'd expand a little on one of the topics I discussed yesterday.

Q: Here's one for you: how long do I need to hang on to old tax returns and old receipts?

A: You should save tax returns themselves indefinitely (yeah, I just said keep em forever :-P) but you can trash back-up documentation (receipts, etc.) after the statute of limitations for audit, which is 3 years after the later of the date you filed the return or the date it was due. So, if you filed your 2010 tax return on time, you can now throw away the documentation for it, although I'd save the return itself.

Correction: if you filed your 2009 tax return (due in 2010), you can now throw away the documentation for it.

That was the short answer.  The long answer is this:

You should keep your documentation until the statute of limitations runs out for the tax return it applies to.

The statute of limitations for assessment of tax (i.e. audit) generally runs three years from the later of the date that you file the return or the date it was due, not including extensions.  Therefore, if you file a return before it is due, you only have to worry about it until April 15 three years later.  If you extend your return or file it late without an extension, worry about it until the date you filed it three years later.

There are some exceptions to this rule.  One is that if you file an amended return within 60 days of the end of the limitations period, the IRS has 60 days from the date you file the return to assess additional tax.  Also, if you under-report your income by more than 25%, the period extends to six years.  Also, there is NO statute of limitations for fraud or if you don't file a return at all!

People love examples!

Oliver files his 2009 tax return on March 28, 2010 (and doesn't cheat).  He can stop worrying about additional tax and audit on April 15, 2013.

Erin files her 2009 tax return on August 29, 2010 (doesn't matter whether she got an extension or not).  She can stop worrying about additional tax and audit on August 29, 2013.

Otis files his 2009 tax return on April 2, 2010, but accidentally excludes a W-2 which would have doubled his income.  His statute of limitations expires on April 15, 2016.

LeeAnna files her 2009 tax return on October 13, 2010, but purposefully claims a credit for which she is not eligible.  She will always have to worry about audit, as well as being charged with fraud.

There are some additional cases where you should keep documentation for longer.  Always keep copies of the tax returns themselves.  If you're really into downsizing, I suggest digitizing (i.e. scanning) these records and keeping backups of them online or on a hard-drive.  We have an IT guy in our office that can help you with this, so if you're interested, please contact me.

Also, if you own property, you should keep all records relating to that property for three years (or the extended statute of limitations) after you SELL it.  So don't throw away anything related to your home or investment properties while you still own them.

Got it?  Good!  Bonfire time!  (hint: I love bonfires!)


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