The IRS Requirements for Record Keeping
We all have heard that we have to keep our tax returns and pay stubs for X number of years. I’ve heard anywhere from 0 to Forever. (I hope your will doesn’t specify who inherits your lifetime accumulation of tax documents.) Well the IRS actually has very explicit rules on this which you need to follow to avoid the stress other issues that come when you receive an IRS letter or notice in the mail. No need to rely on rules of thumb and hearsay. Here is what the IRS says.
Receipts/Cancelled Checks – These items along with other documents supporting an item of income, deduction, or credit that appears on a tax return must be kept for as long as they could become important in the administration of any IRS revenue law. This generally means until the period of limitation expires for that specific tax return. This is 3 years from the date you filed your return. Keep in mind returns filed early (before the tax deadline) are treated as being filed on the due date (usually April 15th). Conclusion: In general 3 years.
Fraudulent or No Returns – There is no period of limitations when you file a fraudulent return or if you didn’t file a return. A fraudulent return is when you knowingly filed incorrectly. Examples would be leaving off income or taking deductions/credits you are not entitled to. The IRS rule is that for income you should have reported is not reported and is more than 25% of your gross income shown on the return the time to assess is 6 years from when the return is filed. Conclusion: Unlimited – File your taxes and don’t try to defraud the IRS.
Claiming Credits and Refunds - If you want to claim a credit or refund on your tax return, the period to make the claim is 3 years from the date the original return was filed (or the due date of the return if filed early), or two years from the date the tax was paid, whichever is later. If filing a claim for an overpayment resulting from a bad debt or loss from worthless securities the time to make a claim is 7 years from when the return was due. Conclusion: In general 3 years. 7 if you claim a loss from bad debt or worthless securities.
Health Care Coverage – Starting in tax year 2014 and later you should also keep records related to yours and your family’s health care insurance coverage. This includes records of employer provided coverage, premiums paid, and private coverage documentation. This is to show that you and your family maintained the required minimum essential coverage as now required by Obama Care. If you are exempt from minimum essential coverage you should keep your certificates of exemption that you receive from the marketplace or other documentation to support the claimed exemption on your tax return. This documentation follows the same rules as receipts and cancelled checks so the statute of limitations is 3 years. Conclusion: In general 3 Years.
Small Business Documentation – If you own a business you need to keep all of your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later. Also, there is no method of bookkeeping the IRS requires you to us but however your account for your financial information it must clearly and accurately reflect your gross income and expenses. These records This can get a little complicated so check out this IRS Publication, Employer’s Tax Guide, for more information. Conclusion: In general 4 Years.
That’s it. Those are the IRS rules. You can shred those pay stubs from your first summer job. Once thing to consider is that you may want to keep your records for non-tax purposes. While there is no law your insurance company, banks, or other creditors may want to see this information.
If you have PJF Tax prepare your tax return we keep relevant documents in digital version for the appropriate amount of years. If you want to learn about all the other benefits of using a professional tax preparer.