How Long Do You Have To Keep Your Tax Records

How Long Do You Have To Keep Your Tax Records

The “statue of limitations” refers to the period of time when you and the IRS can make changes to your tax returns.

Most taxpayers think of the limitation periods as the time frames during which the IRS can audit their returns. The periods for change by you and the IRS are included in the IRS Publications, and are as follows:

  1. Three years if you filed on time or with extensions and did not understate your income by 25% or more, and did not file a fraudulent return
  2. Six years if you filed timely, or with extensions but understated your income by more than 25%
  3. Forever, or no limit, if you filed a fraudulent return
  4. Forever, or no limit, if you did not file a return
  5. Three years after filing or two years after the tax was paid if you filed an amended return or other change to your original return, such as a quick claim refund
  6. Seven years if you filed a claim from a loss from worthless securities or a bad-debt deduction

If you have employees, you must keep your employment tax records for 4 years after the date the payroll taxes were paid or due, whichever is later.

How Long To Keep Records

The  statue of limitations states the time period during which the IRS can audit your returns. If your returns are examined, you need tax records to prove your deductions. This means you need to keep records for longer than you might think.

Assets such as your car,desk, computer, and office building are relevant to your tax return during their depreciable class lives.

  • if you are depreciating the assets, depreciation expense is recorded on your return
  • if you utilize the IRS Section 179 to expense the assets, then you have the potential recapture during the depreciable class life

Recommendation-For any asset that has a life of more than a year, keep the purchase records in a separate permanent file. By going through this process, you do not have to be concerned with class lives or limitation periods.

The 5 drawer method. To use the 5 drawer method, you need to keep your permanent files in its own space. Next, you must report your income and pay your taxes timely to limit your audit exposure to 3 years from the date you file your return. Here’s exactly how it works:

  • Drawer 1- Accumulation of current year tax return information
  • Drawer 2- Last year’s tax return
  • Drawer 3- 2 years ago
  • Drawer 4- 3 years ago
  • Drawer 5- 4 years ago

At the beginning of each year, the contents of Drawer 5 go to the dump and all the drawers move down one notch.

Thoughts That Make Keeping Records More Pleasant

Think of your business records in the same way you would you golf handicap or batting average. The business records should tell where your business is at, and what you need to do to improve.

The fact that the law requires the records is incentive enough to keep them neat, timely, and in a safe place.