He is a responsible and ethical person who always files his tax returns on time — and correctly. He should be in that three-to-six-year category. Or so he thought. Recently, David decided to clean out his old files and shred all his un-needed records. He kept the last decade’s worth.
But having gotten rid of his older tax returns, he can no longer prove it. David asked the IRS for copies of certain missing years, dating back to about 20 years ago. Not only did the IRS not have copies, but they didn’t even have electronic transcripts going that far back.
Why? It’s still on your tax return as a depreciable asset; or you reported the basis when you sold the asset. — You move around often, or have had income in other states — either via a job or an investment that issues a K-1. A heart-wrenching problem Tax, Mama® often hears about is people who suddenly find their IRS refunds being grabbed by other states (via the IRS collection system) with no apparent warning.
In some cases, the tax debt might be 10 or 20 years old. How can the state get away with this? As with the IRS, the state tax system has no statute of limitations on audit or collections for tax returns never filed. If you don’t file and tell them that you don’t owe money, they will assume you do. Keeping your tax records.
Suddenly, someone clever looking to raise easy money for the state turns all those delinquent balances over to the IRS — and your refund gets hit. In fact, we’re at the beginning of one of these fights right now. Steve just got a notice from an eastern state claiming that he owes tax on about $4,000 worth of income from a 2010 K-1.
This will be resolved easily — because we have the records to prove his losses. Without them? He’d have to pay taxes, a variety of penalties, and interest on the whole shebang. If a state comes after you, you may be able to prove you don’t owe them money, too.
You probably have enough deductions or write-offs to wipe out the taxes the state thinks you owe. You may also be able to get the benefit of a tax credit for taxes paid to another state. (Though that may only be available if you file a resident tax return.) There’s inexpensive tax software back through 2000 at Tax, ACT.
— Insurance records. The policy may be paid in full, so you’ve forgotten about it. But should you get hurt, disabled or die, it would be really valuable to your family. Companies change hands and their policy rules change. If you have the original documents, you can prove they owe you more than they would currently pay out.
You get two benefits for keeping these records. First, your state may have had a lower deduction for your contributions. That means, part of your distribution won’t be taxable for state purposes. Second, you may have made non-deductible contributions for federal (and state) purposes in some years - Record Keeping. So part of your distribution won’t be taxable for the IRS either.
After you file, be sure to keep copies of your tax return and related records in a secure place in case there are questions about your return, how much tax you owe, or the amount of your refund. Why should you maintain tax records? To help you prepare an accurate tax return and pay the correct tax To ensure you can prove all items on your return with adequate records or sufficient evidence To address any questions that come up if Virginia Tax selects your return for review To have any necessary supporting documentation in case you need to file an amended return What records should you keep? You should keep copies of your tax returns, and all supporting documentation.
1-102). If the IRS requires you to keep your federal records for a longer period, you should keep your state records for the same period of time. More information on federal recordkeeping.
Business Tax Returns You’ll need to hang onto your business tax returns and all supporting documentation until you can no long be audited for that tax year. In the US, the IRS requires companies to keep their business tax returns for at least 3 years from the time of tax filing.
The IRS also says that it can come after your business for failing to report income for up to 6 years after filing and for up to 7 years if you took deduction on a bad debt. That’s why most accountants recommend that you hold on to your tax return and all supporting documentation for seven years from filing.
Payroll Tax Records If you have employees, the IRS recommends that you keep all employment tax records for at least four years from the time you paid the taxes or filed the return (whichever is later). These records include time sheets, employee information and benefit payments. Employee Records In addition to employee tax information, you should keep all human resources files for any employee, current or former.
Experts advise that you keep these documents for at least seven years after an employee leaves or is fired. In addition, if an employee was injured on the job, you should keep any related records for up to ten years after worker’s compensation was paid. Job Applicant Information In the US, there are several federal anti-discrimination laws that apply to recordkeeping and hiring.
In some cases, electronic is preferred, since paper receipts can fade and become illegible over time. But, if you’d prefer to store all your files digitally, feel free to do so - Tax Season Shredding: What to Keep & How Long. However, one word of caution: it’s easy to rely on your financial service provider (such as your bank or credit card company) to access your account information and history.