April 13, 2017

Tax Documents: What to Keep and What to Shred

As you check “file tax return” off your spring to-do list, you may be staring at another item you’ve been meaning to get to for some time – spring cleaning.

Filing your annual tax return often requires gathering a lot of documents like receipts, W2s and 1099s, expense reports and more. Your desk and filing cabinet may be cluttered with stacks of papers you’d love to shred.

So, what can you get rid of?

The most basic rule of thumb is 3 years, if you have a fairly basic tax return without a lot of complicated deductions and credits. In addition, three years is the amount of time the IRS has the right to flag or audit your return if they have any questions about things you have claimed or deducted. Likewise, you have up to three years to amend a past tax return.

However, if your return is a little more complex, then the answer can be different, and the time longer, depending on a number of factors.

According to the IRS website, here are the cases that have more specific time requirements:

If you file a claim for a credit or refund after filing the tax return. In this case, you should keep all related documents for three years from the date you filed the original return, or two years from the date you paid the tax, whichever is longer.
If you file a claim for a loss from worthless securities or bad debt deduction. In this case, the IRS indicates you should keep all related documents for seven years.
If you did not report income you should have reported. If the unreported amount is more than 25 percent of the gross income shown on your return, you should keep all related documents for six years.
Employment tax records. Keep all related documents for four years from the date the tax becomes due, or is paid, whichever is longer.
If you did not file a return, or you think there is a chance the IRS might suspect your return of being fraudulent. Keep these records indefinitely. The three-year statute of limitations does not apply to fraudulent tax returns.

In addition, we recommend that you keep indefinitely any and all information related to your home, property, investments and retirement income.

If you have non-tax-related documents going back several years or more, you may be itching to get rid of them. We always recommend shredding them and recycling the pieces as a step against identity theft.

If certain documents are no longer needed for tax purposes per any of the reasons above, then you should keep any documents until you have determined they are not needed by other entities. For example, creditors or insurers may require you keep certain documents longer than the IRS requires.

In addition, tax documents can be handy in other situations, such as for insurance companies, lenders and creditors who may need to verify income or asset valuation.

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