Every month I am contacted by a new client who has a tax issue from the 1990’s. That makes having a tax records retention policy a very important issue. You may wonder if it is even possible to have a tax issue going back that far in time. The answer is yes, I hate to say since if you did not a tax return, the IRS will not start the statute of limitations on that year, and its still an “open year” where they can assess taxes against you. The other scenario of when old tax debts are still relevant is where the State, such as New York, has 20 years to collect the tax. Therefore, they are chasing people for tax debts for these years since the twenty years may not have expired yet (since there is almost always a delay after the end of a tax year and when the tax return is audited) so this tax debt is still on the books.
Therefore, it is important to maintain good tax records, and to maintain them forever. This may seem harsh and a painful experience, but its better to keep good tax records than to pay a tax bill that is inflated greatly with interest if you made a mistake and did not file a tax return when you thought it was filed (which is easy to happen with e-filed tax returns) and need your tax records to file a new tax return.
The Lucky number is twenty three years. This is the number of years you should keep your tax records, since you are covered in case of some mistake, and need to prove what happened. This is not as bad as it seems since other permanent records (deeds, Wills) need to be kept forever. Often, it is less paperwork than you think if you get rid of the extra paperwork and envelopes that come along with the tax records. I am sure your still in shock. 26 years is not a short period of time, but it worth it when needed to prove that you paid the correct taxes.
Tax Records Retention
In know your still in shock. Why so long? I will explain a different way. When you file a tax return a number of things can happen. The IRS has three years to audit you and assess additional taxes against you, in most cases. However, in some cases they can go back six years if your income is significantly understated. A disaster strikes when you do not file and then the IRS has forever to create a tax bill.
Therefore, when you file your tax returns, be extra extra careful make sure you receive confirmation that the tax return has been filed and processed. In some cases you may file, and the tax return is incorrect and the IRS rejects the filing. In this case your treated as not filing. As an example, this problem often happens when you take a dependent who was already taken on another persons income tax return. A common mistake.
Save your e-file and mailing receipts with your records. You will be happy you did since I have seen where the IRS misplaces a tax return, or processes a tax return with another persons tax return and does not process yours. You need tax records to fix this issue.