Preparing your tax return can be a confusing process. In addition, many tax payers are unsure of what to do with their tax returns and supporting documentation once it’s been submitted. Are you allowed to throw these records away? Are you expected to keep them for all eternity—in case the IRS ever decides to revisit your tax return from 1983?
The answer boils down to how your tax documentation corresponds to its period of limitations. In today’s post, we examine this concept in greater detail:
What is the period of limitations?
The period of limitations refers to the amount of time you have to keep your tax records on file. This period of time is usually calculated from the date you filed the tax return. If you filed early, then it is calculated from the date the return was due.
In many cases, the period of limitations is three years. However, this length of time varies under certain circumstances:
- If you have employment tax records, keep these for four years past the tax due date or payment date—whichever is later.
- If you failed to report income that you should have reported—and this income constitutes at least 25 percent of the income you listed on your return—keep your tax records for six years.
- If you filed a claim for a loss connected to a bad debt deduction or worthless securities, keep your tax records for seven years.
- If you didn’t file a tax return—or you filed a fraudulent return—keep your tax records permanently.
It’s worth noting that even if the period of limitations has expired based on the above criteria, you may still need to keep certain documents for longer—e.g. if required by your insurance company or creditors. When in doubt, hold onto your documents or consult with an experienced tax attorney for advice.