If you’re like many folks in the US during the first week of January, you’ve resolved to get rid of a lot of clutter in your life, get your finances in better order, and file your taxes early this year.
Right?
Before you turn on the shredder to help you dispose of the reams of paper you’ve been collecting, consider the IRS requirements for keeping personal and business documents. Here’s what I found out when one of my clients (thanks, KP) emailed me with that question today. The following info is excerpted from IRS Publication 583 Starting a Business and Keeping Records (click the link if you want a copy for yourself).
How long do you have to keep tax records?
The IRS says “You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out.”
Huh? What does that mean?
In most cases, that’s the 3-year rule you’ve probably heard of. You have to keep records to prove the numbers on any tax returns that are still open for examination. As long as you’re a regular filer, that period equals 3 years. If you’ve filed a claim for a loss from worthless securities or a bad debt deduction, that time period increases to 7 years.
If you’re a non-filer (you haven’t filed a return) or you’ve filed a fraudulent return, there is no limit to the time that the IRS is allowed to examine your situation. They can look for you for as long as it takes them to find you.
What about records that don’t have anything to do with income taxes?
- Payroll tax records-4 years after the tax is due or paid, whichever is later
- Records concerning assets-3 years after you sell or otherwise get rid of the item
- Records for any non-tax purposes-check with your insurance agent or creditors for their requirements and suggestions
I’m as interested in de-cluttering as you are, but I’m thinking that your critical financial paperwork probably doesn’t take up as much room as some of the odds and ends you’ve bought over the years. Personally, I advise keeping actual tax return copies forever if you have space. Same goes for any paperwork that provides details for the basis of a home or a business or any capital asset or investment property that you own which might be sold or gifted in the future.
You might free up a lot more square footage by downsizing your inventory of shirts, ties, shoes, jackets, and other clothing that no longer serves you. Donate the excess to a local charity and you could get a tax deduction to boot.
Do you have a question about record keeping or business taxes? Leave it in the comment section below.
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