Photo by Brian Wolfe.
It’s time for spring cleaning! Every year around this time I receive phone calls from people who want to know what they can throw away. Hopefully, this will help you decide what stays or goes.
According to the IRS, normally tax records should be kept for three years. For the average taxpayer, 2007 and older can go.
While the IRS says three, I prefer seven. I personally wouldn’t throw away a tax return that’s any newer than 2004. Here’s why: Three years is the general statute of limitations for the IRS to pursue getting additional tax money from you. Oops, you accidentally omitted a W2 when you filed your 2006 return—the IRS has three years to notify you of the mistake and request payment. Normally, too late—too bad. But—let’s say you omitted more than 25% of your gross income from your return, well then-now the IRS statute of limitations is six years instead of three. How do you prove your case without your tax return?
If you haven’t filed a return at all-there is no statute of limitations so throwing away documents is certainly not a good idea there. I always recommend filing a return even if you don’t owe anything in order to force the limitation period.
(I’ve seen a few senior citizens get burned from not filing. It’s rare but it does happen. For example: A business gets audited and they have issues going back 5 years. The business finds it should have issued a 1099 so they send it late to avoid paying taxes and penalties from their audit. Now the senior citizen, who thought he didn’t have a tax issue get’s an audit letter for 5 years ago. His only income was social security and that little job he did on the side. The senior didn’t know about self employment taxes, he just figured the income was so small he didn’t have to file. Now he’s facing huge penalties and interest on a bill that’s 10 years old. Had he filed a tax return, even if he omitted the 1099 income, the statue of limitations would have prevented the IRS from coming after him 5 years later.)
There is also no statute of limitations if you file a fraudulent return. Let’s say you claim a $10,000 deduction for contributing to a charity that doesn’t exist, or one that does exist but you never really gave them the money. (Yes, that’s pretty common and yes you will get caught if you try.) That’s tax fraud, and if the IRS proves that you committed fraud on the one return, they can go back and look at another return, and another, and another. Get the picture? Now, if you’re making stuff up about your charity you won’t have any documents to save in the first place. But you should keep all of the legitimate documentation for those returns in a safe place. Once you’ve been caught committing fraud, everything else on your tax return is subject to scrutiny and without documentation, you could wind up losing your legitimate deductions also.
You’ll want to keep documents that relate to the purchase of a home, stock, or business property for longer; at least until the property is sold, and then for at least three years after that. Especially hang on to documents showing that you have purchased stock. Most people naturally hang onto home and business property documents, but stock purchase documents seem to get lost. In a perfect world, you buy your stock and the company you buy it from keeps the records and you don’t have to think about it. The world is not perfect. Hang on to your stock purchase and sale documents. Without them you’re leaving tax money on the table for the IRS.
If you are not a US citizen and you’re living in the United States, keep copies of all of your US income tax returns forever. The IRS does not provide information to the Immigration Department. Your tax returns could mean the difference between staying in this country and deportation.
If you are a foreign citizen, living in a foreign country and you file or have filed US tax returns. Keep a copy of any US tax return that you have filed and any proof of filing. For you, the proof of filing is what’s really important. If you electronically filed, you’ll want a copy of your e-file confirmation, if you mail returns, use certified mail, return receipt requested and keep those receipts with your tax papers.
If you have business expenses, you’ll want to maintain receipts and records of any expenses you have relating to your business. If you have a home office, that includes your expense records for your utilities, rent or mortgage interest also. If you’re not claiming a home office, you don’t need to save all of your utility bill receipts. Some cities have special programs for seniors where they can get rebates on their utility bills. If you participate in a program like that, you’ll want to save your receipts for as long as the program requires, usually at least a year.
One final thing: if you’re throwing away tax documents, use a shredder. Your tax documents have your name and social security number. Those two pieces of information plus your date of birth will pretty much give an identity thief everything he needs to access your bank accounts, which are often also listed on your tax returns. Be safe out there.