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04/14/2014

Guidelines for Saving Tax Records, Returns and Receipts

Do you really need to keep all those pages and pages of tax records for years and years?   There are some updated ideas to consider about the length of time and in what format you should keep your tax returns and tax-related documentation.  First, let’s review the official requirements and then explore personal options that you may decide to follow to cover all the bases.

How long to keep tax recordsThe IRS has resubmitted its guidelines regarding federal income tax returns recommending that you keep copies of your filed tax returns as well as any supporting documentation (including forms like W-2s and receipts) for three years after the filing date.  That is the time limit during which the IRS may audit you for general tax filing questions.  Also, you may file a claim for a tax credit or refund up to 3 years after the date you filed your original return, or up to 2 years from the date you paid the tax.  In that circumstance, you will need to save your tax records long enough to back up your claim.

However, other IRS actions have longer statutes of limitations including an audit with questions about under-reporting income, which has a six-year statute of limitations. The IRS may also audit you with questions about claims on losses due to bad debts or worthless securities up to seven years after a return is filed.

If you don’t file a tax return at all, or the IRS suspects you have filed a fraudulent return, there is no statute of limitations.  So, this is why most tax advisors recommend you keep copies of your tax returns and supporting documents indefinitely.

Rules for saving state income tax documents vary.  Most states, including Missouri, follow the federal three-year rule.  Kansas also has a three-year limitation, but has options on the date it may choose including the latest of:  the date the return was filed, the date the return was due, or the date the taxes due on the return are paid.  Montana has the longest statute of limitations at five years after the date the return is due or was filed whichever date is later.  Arizona, California, Colorado, Kentucky, Michigan, Ohio and Wisconsin can assess a tax debt four years after a return has been filed.

If you amend your federal tax return or it has been adjusted following an IRS audit, the statutory limitation on action regarding your federal and state tax returns may be re-started.  If you enter into a payment agreement or an offer in compromise, this also re-starts the statute of limitations.

Meanwhile, all employment tax records should also be saved for at least 4 years after the date the tax becomes due or is paid, whichever is later. Some advisors recommend you save all proof of income statements until you file for retirement just in case there is a question about your income when computing and claiming Social Security benefits. Also, property-related records have different limitation periods depending upon when you dispose of the property and when you use the records to determine depreciation, amortization or depletion deduction as well as figure any gain or loss.

There are no official rules for how you store your tax records, but keeping them organized by tax years will pay off should you be audited or wish to amend a return.  The IRS and state tax authorities require you to provide a copy of your tax documents in a timely manner when you are audited.  It is suggested that you keep your tax records in an orderly fashion in a secure place that cannot be accessed by identity thieves and is protected from weather extremes.

With today’s technology, you can store a digital version of your tax information on a personal computer or device, or in the cloud on a secure network.  But be mindful that you must also scan and store all documents and receipts, not just your tax return.  The IRS requires that your electronic storage system “must index, store, preserve, retrieve, and reproduce” records in a “legible, readable format.” Your storage method must also be accessible for the same statute of limitations as printed documents.

McRuer CPAs offers the latest, most-secure document upload and download technology through MySafe Exchange. Ask your tax professional for an electronic version of your tax documents which you can then save on your personal computer, thumb drive, disc or any other digital storage device that you feel is secure.  Your preparation professional should also save a digital copy of your return.  The best rule of thumb is to orderly maintain your printed documents while also storing a backup digital version.

Even when your records are no longer needed for tax purposes, check to see if you have to keep them longer for other purposes, like may be required by insurance companies and lenders.  And when you feel you are safe to dispose of the tax records, make certain they are shredded or destroyed so that no personal information is accessible.

What specific records do you need to keep?  Find out more in our blog: Tax Records You Must Save.

For more information on the tax document storage method that best suits your needs, contact us at McRuer CPAs.

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