A common questions asked by taxpayers is how many years tax records must be kept. The answer to this question is not cut and dry and varies depending on the documents in question. The general consensus is that seven years is a safe bet however the actual amount of time required by law may be fewer than seven years and in some cases longer. Here we look more closely at the length of time tax records should be saved.
According the the Internal Revenue Service (IRS) the specific length of time depends on the period of limitations for the particular return. The period of limitations is defined as the length of time that you are allowed to amend your tax return or the amount of time the IRS can audit your return. As a general rule the period of limitations begin on the day your taxes were filed, unless you filed your taxes early at which point the period of limitations would begin on the due date. The IRS recommends keeping tax records not just for legal reasons but also to help prepare future returns or when filing an amended return.
This information is critical to filling out your tax return. Especially if you are using tax software such as TurboTax.
The following time table will help you determine how many years tax records must be kept:
Three years- Anyone owing additional taxes must keep their records for three years. If you have filed a claim for a credit or tax refund after you have filed your return you must keep records for three years from the date you filed your return or the date you paid taxes.
Four years- Employment tax records must be kept for a minimum of four years from the date the tax was due or paid.
Six years- If you have filed a tax return the did not include reportable income (more than 25% of the gross income reported) you must keep your tax records for six years.
Seven years- When a claim has been filed for a loss from securities or bad debt, all records must be kept for seven years.
Indefinitely- If you have not filed a tax return or file a fraudulent return, you must keep all records for that period of time indefinitely.
In addition to the guidelines listed here for tax returns, the IRS also recommends that you consider whether or not tax records are connected to assets or non tax purposes which may require you keep them for a longer period of time. Tax returns and associated documents may be needed to determine depreciation, amortization or depletion deductions when the time comes to sell property.
There are other situations which may require a taxpayer to retain tax returns and other documents beyond the period of limitations set by the IRS. Insurance companies and creditors in some cases require tax return records past the standard period of limitations. To avoid disposing crucial tax documents you may want to consider your own maximum period of limitations to ensure you are not destroying records that may be needed at some point down the road. It is also important to remember that the IRS destroys your original tax return three years after the maximum period of limitations, making it even more important to ensure you will not need any information associated with a tax return before destroying the documents.
Want to learn more about RESPs? Buy The Book:
The RESP Book: The Simple Guide to Registered Education Savings Plans
Everything you need to know about RESPs.