How Long to Keep Tax Records?

If you are like most individuals, you have a drawer in your home or a box in the garage that contains all of your tax returns and supporting information from 1987. It is the sacred box of “all things to defend myself from the IRS”. Today, I am providing you some guidance that will help you clean out that drawer or box as well as relieve your mind from future inquires of taxing agencies.

There is no other word that strikes fear in the hearts of citizens worse than “Internal Revenue Service”. You go to mailbox and open it with a smile hoping that Ed McMahon has sent you the winning ticket to a sweepstakes only to find an ominous envelope from the IRS. Before opening the envelope, your mind races through a myriad of circumstances and outcomes. Survival instincts fire in your brain that you should seek a lawyer or CPA, transfer assets to other relatives or some other ridiculous plan to counter the attack by this federal agency.

Would you believe that most correspondence from the IRS is clerical in nature? The complicated system of revenue collection in the United States does not process without mistakes. A few years ago, one of our new clients came to the office, looking white as a sheet, and holding a rather large, white envelope. Her introduction omitted pleasantries and she immediately initiated her case of fearing the IRS and now “I will lose my house!” After speaking with her for a few minutes, providing a nice cold drink of water, and opening the envelope to read its contents, we disclosed some good news to her. She didn’t owe the government any money, she was actually receiving a refund. She looked at me with her eyes as big as silver dollars and exclaimed, “What?” Her previous tax returns, prepared by someone else, had omitted one of her estimated tax payments and she was receiving a refund of almost $21,000. 

The moral of this story is that many citizens do not understand the role, authority and power of the IRS. This agency is one of the most powerful of our government. However, in my 33-year career of interacting with the IRS, I have experienced very few instances where I was treated unfairly or unprofessionally.

Maintaining proper and complete records of your financial transactions reported on your tax returns is critical to good outcomes. The statute of limitations for most individual income tax returns is three years from the date you filed your return or two years from the date you paid the tax owed. This means that any of your individual income tax return forms can be destroyed or scanned to electronic storage. You should keep all records to document income, expenses, gains and losses from the three years’ of returns so that you may properly defend your tax returns should you be selected for audit. Wow! That sounds like a sinister word – audit.

Certain documents should be retained indefinitely such as property deeds, birth certificates, gift tax transactions, stock certificates, bonds, and marriage licenses. Most of these documents can be reclaimed but the process is rather time consuming.

The key to a pleasant and happy life is to understand the role government plays in our lives. Too often myths and speculation rule our minds when the actual facts are much less menacing. If you receive a notice from any taxing agency, contact your CPA or tax preparer to determine the appropriate response. As citizens, you have appeals rights, amendment capabilities and other actions you can take to mitigate or eliminate your tax matter.

If you have a question about filing your individual income tax returns, click this link for information that may be helpful. Until next week, stay safe and well.

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