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How to Properly Organize Your Tax Records

Feb 21, 2019

There never seems like a good time to organize your tax records, but the period between filing last year’s taxes and this year’s return can usually be perfect. While this task is never exciting, getting it done and out of the way will only save you time and plenty of headaches down the line.

Rules for Tax Laws

A good rule of thumb is to keep your tax records for as long as the IRS can legally assess any additional taxes you may owe or audit your returns. That means keeping your records until the statute of limitations runs out—usually three years after you originally filed your return or three years after the original due date on the tax return.

There are some cases, though, when the statute of limitations extends beyond the standard three years. The limitations period can jump to six years if you understate your adjusted gross income by more than 25%. Also, no statute of limitations exists if you fail to complete or file a fraudulent return.

Longer Limitations Periods

It is important to consider the exceptions to the IRS statute of limitations. You should always keep a copy of your yearly tax returns regardless of the statute because there may be a time that you will need a previous return on hand.

For example, it is common for the IRS to destroy your original returns after about four or five years. So if the IRS comes back ten years down the road and claims you never filed your return for a particular year, you have the proper evidence to support yourself. Although the limitations period for filed returns may have long expired, the IRS can assess tax for that year if you have nothing to prove that you filed the return. Keeping a copy in your records at all times could prevent you from having to pay duplicate taxes.

It is also wise to keep W-2 forms until you at least start receiving Social Security benefits. If a question comes up about your work records or yearly earnings, you may need to have a copy handy.

Property and Other Investment Records

In the case of property records, always keep closing documents and initial purchase and capital improvement records for a minimum of three years. It is recommended to keep them for six years if you may have understated your income by more than 25% after filing your return for the year you sold the property.

In the case of stocks or other types of securities, you should keep purchase statements and trade confirmations for at least three years. Again, keeping these records for up to six years is recommended after you have filed your return for the year you sell these assets.

Always Keep an Eye on Your Records

Before you know it, years’ and years’ worth of financial and tax records start to build up. The more organized your system is to keep record volume in check, the better off you will be if you need access to previous years’ records if an issue arises with the IRS. For more advice on what records you can keep and what you can get rid of talk to your CRI tax advisor.

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