Once you have submitted your tax return to the Internal Revenue Service (IRS), you might not keep your documents or misplace them. However, you have to hold on to your tax records for a certain amount of time so you have a reference in the future in case you have disputes with the IRS or if the IRS audits you.
According to experts, the general rule is to keep your tax records for three years. The reason behind this is because under the law, the statute of limitations as to when the IRS can audit your tax return is only up to three years upon submitting it to them. The IRS, however, noted that it might be wise to hang on to your documents for a longer time.
One of the instances you need to have your documents with you longer than three years is when you claim a deduction of worthless securities or bad debts. To effectively claim this, your records must be stored for seven years. For instance, if you lend money to your friend amounting to $10,000 and you executed a promissory note, then your friend went bankrupt, your records are necessary to prove that the debt he or she owes you is legitimate and was never paid.
For those employed, they need to keep their tax records for as long as four years. For property owners, they must keep their tax records for three years or longer from the time the property is sold or disposed of. To illustrate, if you have a car in 2010 and you used it for your business then decided to sell it in 2020, you have to keep your records from 2020 to 2023 or longer. Another instance is when you exchange your property for another property. You have to keep your records for your old property until the statute of limitations runs out.
Further, in circumstances when you do not report your income that you are required to report, and it exceeds 25 percent of the income shown on that year’s tax return, the IRS can audit such return even after six years. In line with this, a fraudulent tax return allows the IRS to audit your return indefinitely.