2022 Tax Season: How Long Should You Hold Onto Those IRS Tax Records?
From BusinessInsider.com
Whenever you file your taxes, a trail of documents are involved. After you’ve settled up with the Internal Revenue Service, you might be tempted to just toss all that paperwork. But the IRS recommends that you preserve your tax returns and related documents for at least three years. Within three years, you can file amendments to your tax return in order to claim a credit or refund. Additionally, the IRS statute of limitations allows for questioning or auditing a return during that time frame.
In addition to your tax returns, you should keep any supporting documentation. The things you should keep include your W2 form, 1099 forms, records of unemployment payments, credit card receipts, invoices, mileage records, statements detailing any securities transactions you made, and documents detailing contributions made to retirement-savings accounts. However, a more complicated tax situation will lead to a longer required holding period. Here are tips on how long you should hold onto these types of returns:
Keep your tax records for 6 years if you omitted some income
The IRS requires you to keep your tax records for six years if you under report income that accounts for more than 25% of the gross income. This extended time requirement won’t apply to you if you have a cut-and-dried tax return with straightforward W2 income. But if you have a complicated return that intentionally underreports income, then the IRS has six years to check the records and assess more tax.
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Quick tip—The IRS receives information from a variety of sources about your income and uses an automated system to spot potential discrepancies. If there is a potential discrepancy, a tax examiner will review the document further. Depending on what they find, the IRS may assess additional taxes.
Maintain tax returns and records for 7 years for capital losses
If you claim a capital loss from securities or bad debt on your return, keep the records for seven years. The extended record-holding period gives the IRS ample time to check into your claim to confirm that the appropriate amount of tax was paid. In addition to your tax return, make sure to keep detailed records on the capital loss itself.
Keep records for 10 years or longer under certain circumstances
Tax filers who have paid taxes to a foreign government can claim a credit or itemized deduction on those taxes up to 10 years later. The credits and itemized deductions are only available if the same income is subject to US tax. But hanging on to those tax records for the 10 years will help you justify the claim if the need arises.
If you are a property owner, there are additional time requirements to consider. For one, you’ll definitely want to hold the tax records related to a particular property for the duration of your possession. These records will help you determine any depreciation, amortization, depletion deductions, and capital gains related to the property. After you sell the property, you’ll need to keep the records until the period of limitations expires. But there’s a catch when it comes to nontaxable exchanges. If you obtain property in a nontaxable exchange, you’ll need to keep the tax records of both the old property and the new property until the period of limitations expires when you sell the new property.
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Quick tip—Section 1031 of the tax code allows you to exchange real estate properties of the same type without recognizing a capital gain or loss. Investors and businesses can use this opportunity to further their investment goals without incurring a big tax bill.
The financial takeaway
The IRS clearly outlines the guidelines around how long you should keep your tax records. But some experts recommend holding onto the returns for even longer than the IRS says you should. “It’s easy and convenient to scan and upload to the cloud, and there is very little downside to keeping old returns, but lots of potential nightmares lurking if you need an older return and can’t access it,” says Matthew Jenkins, CFA, CFP and founder of Noble Hill Planning. Ultimately, you’ll be safe following the rules of retention laid out by the IRS. But if you want to hold onto those records longer, it won’t hurt to have them available if you need them.
Note that NIHFCU does not provide tax advice. Please consult with your tax advisor.