How long should I keep my tax documents?
Many of you are expecting the answer three years, five years, maybe seven years, something like that, because there's information like that all over the internet. You can do a Google search and come up with all different kinds of suggestions. Some are fairly legitimate.
Generally speaking you can be audited by the IRS for the past three years. They can easily extend that to six years so that’s where its commonly noted to maintain documents for at least seven years.
But my answer is going to be different. My answer is how long do you want to be able to defend yourself against a tax assessment?
If somehow someway you get a tax assessment that goes back further than six years and you shredded documents to cut down on your clutter and then you need those to defend yourself how will you do that if you don’t have them anymore?
It’s unfortunate but if you get audited or assessed a tax by a tax agency, you are basically guilty until proven innocent. There are taxpayer rights laws in place and you need to take advantage of them, but if they say you owe tax and you do not have the records to challenge their claim, how will you win?
Telling them you are correct and they are wrong and that they should trust you won’t work. You may very well be right, but that’s the same thing the crooks say and the tax agencies hear it all the time so words alone are rarely a defense.
A real-life example I am going through as I write this article which is really why the article is being written. We do not know the outcome of it yet, but as with many of my articles they come from real life experiences with clients so I hope provide some value.
The situation is Fred and Wilma (not real names) have been assessed a tax covering several years by the state they used to live in. They recently received a notice that a lien has been placed on them by that state and it covers unpaid tax from 2010 to 2016. Its now 2023 so way beyond the standard 3 years.
We are still gathering information, but its appearing that they were actually assessed by that state way back in 2018 when the state compared tax records filed with the state with the IRS.
I don’t know about all states but I know Hawaii does that and if the state tax department thinks you owe them state tax from information they see on the IRS tax filings, they assess you that tax.
In Hawaii you have 30 days to respond to that assessment and if you don’t it’s considered to be correct and they move to collect on you.
Many people don’t respond within that 30 days because they are scared and panic and don’t contact someone to help them until those 30 days have passed.
In Fred and Wilma’s case, they didn’t respond because they didn’t even live in the state anymore. They moved before 2018 so never received the mailed tax assessments from the state.
The state generally doesn’t care about that. Through past conversations with them their position is that you are supposed to tell where you moved to, so not the state’s fault that you didn’t get a tax assessment and couldn’t have responded within the time period.
Tax agencies have to follow certain rules of escalation but eventually that leads up to filing liens against your property and or garnishing bank accounts and wages or collections from customer payments to you.
So in this case since it appears that the assessment was done in 2018, that it reached back to 2010 is not that far back from that point in time but its now 2023 and coming to light.
But the issue and the point of this article is that without the documents needed to defend yourself you really have no defense.
At this point we don’t know why the state has filed the assessment because no one has been able to tell us, but when we do find out, if there are not adequate documents that still exist to refute the assessment it will be a difficult and potentially impossible task to accomplish.
So what is one to do to keep records but not have boxes and boxes of paper sitting around?
Technology. With modern technology there is no reason why you cannot keep years and years of documents. If you're a business owner and you haven't invested in a good scanner to scan your business documents and preserve them, then get on it now and get one and get started before year end. Its most likely even a deductible business expense.
If you're an individual W-2 wage earner then you're probably going to have to pay for that out of pocket.
Get a good scanner. I'm not going to list any particular models here. Consider one that has a document feeder on the top to scan multiple pages at one time.
If you have a lot of pictures from past film cameras consider a high quality one to digitize those pictures.
Scan your tax documents and save to a portable hard drive. You could save to your computer but what happens if your house burns down or the roof blows off in a storm and your computer is destroyed too? So even if you keep a digital copy close by, make a longer-term storage copy and put in your bank safe deposit box and get one if you don’t have one.
Can the IRS or the state ask for paper receipts? Certainly they can, but so far in every audit situation I've been engaged with every single IRS or state auditor has asked me to email or fax it to them or put it onto a CD and mail it to them and those are obviously digital copies. So far, not a single one has ever asked for an actual hard copy.
Does that mean that you might run into somebody who does want hard copy? Absolutely. But in my experience so far a digital copy has always been sufficient. But what is critical is that its legible and it has the proper documentation on it.
For example if you want to deduct a business meal you need the receipt, a list of who was there and the business purpose. Most folks don’t do that but it’s the requirements whether its hard copy or scanned.
So there is virtually no excuse not to have years and years of tax data and other important documents to support your position with the use of modern technology.
Certain documents you might truly need years and years into the future. Documents related to your retirement plan contributions that you made, statements from the investment company which are usually downloadable in PDF form.
Very important are cost of investments. I’ve seen people have to overpay tax because they didn’t have a document that showed what they paid for an investment but when it was sold the sales price was provided to the IRS but they had no proof of what they paid for it.
Anything real estate such as a purchase should be kept forever is what I’ve always read. And with scanning technology its easy to do. What about your Will or Trust documents? Will your heirs be able to find them when you’re gone?
Will it take time to do? Yes. Is the time worth it to potentially save thousands and tens of thousands of dollars of tax assessment that you couldn’t defend yourself without? I’ll leave that answer up to you.
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The information in this and other articles is intended to be educational in nature only. Not tax, legal or investment guidance for you specifically. Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.