Maintaining thorough tax records is essential for accurate filing and peace of mind. Let's look at essential guidelines and tips to ensure you're well-prepared.
How Long Should You Keep Records?
Generally, retain records that support any item of income, deduction, or credit on your return until the period of limitations expires. This is because they may become material in the administration of any provision of the Internal Revenue Code.
Here's a breakdown:
For assessment of tax you owe:
3 years: Generally, this period is 3 years from the date you filed the return. Note that returns filed before the due date are generally treated as filed on the due date.
No Limit: There's no period of limitations to assess tax when you file a fraudulent return or when you don't file a return.
6 years: If you don't report income that you should have reported, and it's more than 25% of the gross income shown on the return, or it’s attributable to foreign financial assets and is more than $5,000, the time to assess tax is 6 years from the date you filed the return.
For filing a claim for credit or refund:
The later of 3 years or 2 years after tax was paid: For filing a claim for credit or refund, the period to make the claim is 3 years from the date you filed the original return or 2 years from the date the tax was paid, whichever is later. If no return was filed, the period to file a claim is 2 years from the date the tax was paid.
7 years: For filing a claim for an overpayment resulting from a bad debt deduction or a loss from worthless securities, the time to make the claim is 7 years from when the return was due.
Special Cases for Record Keeping
Property Records: Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. These records are crucial for figuring your basis for computing gain or loss when you sell or dispose of the property.
Healthcare Insurance: Maintain records of your and your family members' health care insurance coverage, especially if you're claiming the premium tax credit. You'll need information about any advance credit payments you received through the Health Insurance Marketplace and the premiums you paid.
Business Income and Expenses: If you're a business owner, choose a bookkeeping method that clearly and accurately reflects your gross income and expenses. Your records should substantiate both your income and expenses. If you have employees, keep all employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.
Types of Records to Keep
Receipts
Cancelled checks
Invoices
Credit card statements
Any other documents that support income, a deduction, or a credit claimed on your return
Tips for Staying Organized
Go Digital: Scan and save important documents.
Label Everything: Clearly label files and folders.
Back-Up: Keep copies of your digital records in a secure location.
By following these guidelines, you'll be well-prepared for tax season and any potential inquiries from the IRS. Staying organized is the key to a stress-free tax experience!