During tax season I often get asked about what tax records should be kept and for how long.
For this week’s post, I’m going to focus on the basics and provide some good general rules of thumb.
For starters, it’s good to know that even the IRS has a statute of limitations. The statute of limitations limits the number of years during which the IRS can audit your previously filed tax returns. Once that period has expired, the IRS is legally prohibited from asking you questions about those returns.
One major exception to this rule is “fraudulent” returns.
If you file a “fraudulent” return, or don’t file at all, the limitations period doesn’t apply. In fact, the IRS can get you at any time!
But, since I know this doesn’t apply to anyone smart enough to be reading this article, let’s get to the good stuff.
The reasoning behind the statute of limitations is that, as we all know, after a period of years, records can become lost or misplaced and our memory isn’t as accurate as we would hope.
Once the statute of limitations has expired, the IRS can’t go after you for additional taxes, but you can’t go after the IRS for additional refunds, either.
The Three-Year Rule
Generally speaking, the IRS has three years from the date you file your return to assess additional taxes. Conversely, if you’re looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax.
A couple exceptions:
- The IRS has six years to challenge your return if it thinks you underreported your gross income by 25 percent or more.
- If you’ve claimed a loss from a worthless security, the limitation period is extended to seven years.
My Suggestion: You Can Throw Away After Seven Years
Although the IRS has three years from your filing date to audit your return if it suspects good-faith errors, I usually tell people to keep their records for seven years for safe measure. A few extra returns is not going to take up that much more space in your file and it’s good to always be prepared.
That being said, if you’re in your 40’s and you’re still holding on to your tax returns from when you were in college, you’re probably safe now, and can shred those returns.
If you do ever need any tax or financial advice focused on your specific situation, feel free to contact me anytime.
*Please keep in mind that all the information I post on this site is for general purposes only. I understand that every person’s situation is unique and should be treated as such. If you would like more information about how something listed in any of my posts specifically affects you, please feel free to comment below, email me, or call me anytime.