Cleaning Out Tax Files: Which Ones Should You Keep?

During the financial year, we all receive many important documents that help you calculate tax returns. Payment summaries, invoices, contracts, and receipts are some examples of such documents.

If you are new to the taxation system—whether you’re a new taxpayer like a student right out of college or otherwise—understanding all these things can be overwhelming. Young adults often find themselves confused about which documents are important and which can be done away with.

When it comes to tax records, you need to be careful. Here’s some guidance relating to tax files.

Why the need to keep tax records?

Most individuals don’t want to think about tax returns once tax season is over. Hence, they end up in some drawer in their home. Others keep their records out of fear of being audited. They prefer keeping organized records in case they’re ever needed as proof. The original documents you possess can be presented to the IRS in case they have any questions.

Tax documents include receipts, bank statements, and other documents.

Another important reason to keep your records is to fix errors. Suppose your last year’s tax returns were filed, but the IRS notifies you of an error. You need to file an amendment for which your tax returns history is needed.

Having easy access to your documents in such circumstances makes the whole experience easier.

Which records are necessary to keep?

There’s a long list of documents that you should be storing at home; each person’s record keeping history will be specific to them.

The IRS recommends that individuals keep any documents that support the income you state and any deductions or rebates you are claiming. There’s a timeline that the IRS follows, after which the tax return expires.

Here’s a list of records you need to keep, according to the experts:

  • Proof of income: bank statements, W-2s, 1099s, brokerage statements, spousal-support records, remittance payments received, etc.
  • General financial records: utility bills, credit card statements, checks that have bounced, mileage logs, and such.
  • Records of your property and assets: purchase and sale agreements of your property and other assets, mortgage-related payments, records of assets sold (e.g. car or house), rent agreements.
  • Investment records: records of any stocks bought and sold, any government securities, mutual funds, partnerships, etc.

How long should the records be stored?

The IRS recommends that individuals keep their tax records for three years after they’ve filed. This timeline gives you the time needed to amend your returns and acquire the necessary deductions and rebates.

Here are some special scenarios which require you to keep the records longer:

  • 7 years when a loss has been claimed from securities that went ‘bad.’
  • 6 years if you omitted income that should have been reported (only if that sum was 25% or more of the return)
  • Indefinitely if you filed a fraudulent return.
  • 4 years for employment tax records.

 

One Place Financial offers personalized solutions are great service to our clients. If you are looking for a tax consultant in Bellflower, CA, visit us. We also provide sales tax filing services. Contact us at (562) 867-5200.