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Properly maintaining your records, even after filing your tax returns, is necessary in the event of an audit. The IRS will need to review your tax documents to substantiate your prior returns. The questions many clients have are: What documents can I shred? How long should I keep my tax documents after filing my tax return? What documents should I retain?

Record Retention

Federal Income Tax returns can be audited for up to three years from the date of filing. However, the Internal Revenue Service (IRS) may audit your tax return for up to six years after the filing date if there is substantial unreported income, and may audit indefinitely if no return, or a fraudulent return, is filed. We recommend that you retain your documents for at least 7 years. You should also take your state’s statute of limitations into consideration, as certain states may require you to retain documents longer. The following are some common documents and records that are important to retain in the event that you are ever selected for an audit:

  1. Records of any income received, including W-2s and forms 1099
  2. Work-related expense items
  3. Brokerage statements
  4. Medical expenses
  5. Charitable contributions
  6. Retirement accounts
  7. Home improvements, refinances, or sales
  8. Schedules K-1

Although it is generally recommended that you keep records of your tax information for seven years, certain documents should be retained longer in case the IRS ever comes calling. Any documents providing details of capital assets (real estate, private company stock, worthless securities, bad debts or K-1 schedules) should be retained 7 years after the asset is sold or disposed. These documents are vital to calculating depreciation on certain assets and determining the gain or loss upon sale of an asset. In addition, if you receive property in an exchange, it is important to keep documents from the old property as well as the new one. You should also consider keeping each year’s tax returns and real estate and property improvement records indefinitely.

While record retention is important for tax purposes, there are other reasons to hold onto documents besides the risk of an audit. Be sure to talk with your insurance company or creditors to ensure that you have retained any required information necessary for your loans or policies.

One last piece of advice: any documents that are ready to be tossed should be shredded to protect your identity.

Retaining sensitive documents securely is an important process, but it can be cumbersome. If you have any questions regarding record retention, or any other tax matters, please do not hesitate to contact your L&B professional at (858) 558-9200.

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