How to Easily keep Tax Records for as long as you need them. And be ready anytime for the Inquiring Mind of the IRS.
The IRS has more than one employee. They have more than one division. Do they have more than one mind? They do have one mission. The mission of the Examination Division is to determine if the correct amount of tax was paid.
When it comes to your tax returns, IRS has certain requirements.
My Top 5 Tips are simple
. Here is a recap of the 5 tips I gave you in my last blog of 2014.
- Keep your copies of your tax returns FOREVER.
- The Internal Revenue Service has THREE YEARS time to examine your tax records. This is called the Statute of Limitations for examination or audit.
- Your state has MORE time. Arizona has ONE more year. California has TWO more years. Which state are you in? How much longer do they have to look at your tax records?
- For calendar-year tax return items, you must keep your records AT LEAST five years. But some records need to be kept even longer.
- Don’t be in too big a hurry to get rid of the paperwork. Keep the original documents. Scan them. Use a cross-cut shredder to really destroy the no-longer needed documents.
Now, I’ll share HOW to easily use a multi-drawer cabinet.
Once you design your own system, it will save you time, money and tax headaches…
- A plastic cabinet is convenient, but not secure like a locking cabinet. How many drawers does it have? Have one drawer for each of the 5 prior years plus a drawer for the current year. Permanent files will take up more space over time, so you may want a more secure place for your long-term permanent file.
- Label the drawers 2015 (current paperwork for the coming year.) 2014, 2013, 2012, 2011 and 2010 for the years still open for audit. Look at the date you filed your 2010 tax return. Count forward five years to determine when (what date) it is actually safe for you to begin shredding.
- In each of the 5 years’ drawers keep your tax return for that year. Keep a small box for your income records, your expense receipts and records of anything you sold in that year.
- Keep a file of paperwork related to assets or investments you still own. You will use this “basis” information In the year you sell an asset or investment. It will help your determine the gain or loss on the sale. In the year of sale, that paperwork will go into that year’s tax box.Because state returns are generally based on the federal return, keep the IRS return and the state return’s documents together.
- Save the tax returns in your permanent drawer. Shred the documents that are related to items only pertinent to a single year’s tax return for which the statute of limitations has already expired. For 2010 returns timely filed in 2011, the IRS statute “tolls”, or expires, in year 2014. The Arizona statute for 2010 returns runs out in 2015. The California 2010 tax return expires in 2016.
If you have been flirting with tax evasion or tax fraud, the IRS has more than three years to look at your return. They have FOREVER to look at a fraudulent tax return. You be the judge. Let your conscience be your guide. Stay out of tax jail. Be honest with yourself and on your tax return. Have a happy year!