Spring is a time for cleaning out your home to make room for the new, which means purging old paperwork you no longer need. You may wonder if it's safe to shred your old tax returns, and the answer is: It depends.
Always keep your tax returns for at least three years, but there are times you should hold onto them even longer. This guide will help you determine what paperwork to keep and which papers you can toss, according to the Internal Revenue Service (IRS) rules about audits and documentation.
Why three years?
In most cases, the IRS has three years from the date you filed your return -- or April 15 of that year, whichever is later -- to initiate an audit. So you need to keep all related tax documents including your tax return, W-2s, Form 1099s, and other tax paperwork for this long, at a minimum. You should be able to access returns from previous years through your online tax software account if you used one, but it's a good idea to keep paper copies, too.
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Hang onto any documents associated with tax deductions. For instance, keep utility bills if you claim a home office deduction, or your bank statements if you need proof of your charitable contributions. You don't have to submit these records with your taxes, but if you're audited, the IRS can disallow these deductions if you don't provide the paperwork to back them up.
If you don't keep a shredder at home and don't have one available for use at work, you can visit an office supply store to safely dispose of these sensitive documents.
Why you may want to keep your tax returns longer
There are a few exceptions to the three-year statute of limitations on IRS audits: If you failed to report 25% or more of your gross income, the IRS can start an audit of you for up to six years afterward, and if you filed a claim for worthless securities or a bad-debt deduction, it can audit you up to seven years later. If either of these apply to you, keep your tax returns until the statute of limitations is up.
Also, if you failed to file a tax return one year, or if you filed a fraudulent return, the IRS recommends keeping tax records from that year indefinitely.
Your state may have different rules for your state tax return. Some have statute of limitations of four to five years, and these could be even longer if you failed to report some of your income, or falsified your return in some way. Check with your state tax authorities to determine how long you should keep your state tax return.
There are times you may want to hold on to your files longer than the law mandates. For example, if you made improvements to your home and you plan to sell it, you should keep receipts of your renovation expenses to prove how much money you invested in the home. Otherwise, when you sell it, the government may think you made more money off the sale than you actually did, and try to overtax you.
You may prefer to keep your own records indefinitely so you can always verify that the government's information is correct. If the IRS missed some of your income one year, it could reduce your Social Security benefits later on. And if you don't have the paperwork to prove the government is wrong, you won't be able to fix this injustice when you need the missed money in retirement.
You don't have to keep physical copies of all your tax paperwork. Consider scanning receipts and other tax documents onto your computer and then backing them up to the cloud or an external hard drive. This can reduce clutter in your home while still keeping your important paperwork close at hand. When in doubt, it's always best to keep tax paperwork, just in case. If you toss documents too early, you could end up in a lot of hot water with the IRS, or your state tax authority.
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