How Long Should You Keep Any Tax Records?
Tax season, for all of us, involves compiling documents that support any income, deductions, and credits claimed on your tax return. In the years of filing your taxes, how long should you hold onto these records? Colleen McCreary, chief people officer at Credit Karma, says that the Internal Revenue Service (IRS) recommends to retain your tax returns for a minimum of three years after filing. She explains that this is due to the amount of time you have to amend your return to claim additional eligible credits and or refunds. In addition, the three-year time period is also the amount of time the IRS has to audit you. "It's easier to have your information on hand for situations like these instead of searching for expunged documents nowhere to be found," she adds.
The Rule and the Exceptions
While three years is the golden rule, there are some exceptions. McCreary gave a breakdown of scenarios wherein it's best to keep your records for up to seven years or even permanently: Retain records for seven years if you file a loss claim from worthless securities or reduction of bad debt; six years if you fail to report income that you should have (but only if that income was more than 25 percent of the gross income you reported on your return); four years for employment tax records; or permanently if you don't file a return or if you believe to have mistakenly file a fraudulent return.
How to Dispose of Tax Returns
In the case that you do decide it's time to discard your old tax returns, how do you do so safely? "When you've decided to toss your tax returns, the key is to dispose of the documents properly," says McCreary. "Tax documents contain lots of sensitive information, including your social security number, bank statements, and brokerage account statements. Shred the paperwork, if you can, to avoid the risk of identity fraud."