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Spring Clean Your Tax Records

April 26, 2016

Keeping all your tax documents forever can lead to clutter and confusion. In the interest of making tax filing simple every year, it’s good to know which tax records to keep and which ones to dispose of. To begin with, stay organized all year round by making separate files for short-term and long-term tax records. Here are some simple and effective methods of organizing your tax records:

The 3-Year File

Usually, the minimum duration for which you need to keep your tax documents is three years. These include records that support items on your return such as bills, credit card and other receipts, mileage logs, and other proof of payment.

It’s a good idea to keep your records for 3 years from the date you filed your original return, or 2 years from the date you paid the tax, whichever is later. In the case of an audit, the IRS normally asks for important tax records dating three years back.

Additionally, the IRS advises taxpayers to keep their employment tax records for at least 4 years after the payment due date or the date when the tax is paid, whichever is later.

The 6-7 Year File

If a taxpayer underpaid taxes by a big margin (more than 25% of the gross income on the return), the IRS can ask for tax documents of up to 6 years back. If you file a claim for a loss from worthless securities or bad debt deduction, then keep your records for 7 years.

The Indefinite File

If a taxpayer does not file a return or files a fraudulent return, then tax records need to be kept indefinitely. If there’s non-compliance such as non-payment of tax debt or tax evasion, it is smart to keep the records intact.

Organizing Tax Records

It is important to have a system of organizing tax documents that is simple and easy. Most taxpayers have both paper and electronic tax documents. To keep them in order, use the same tag for related paper and electronic folders. Also, having a box or a drawer exclusively for all physical tax folders can make access easy.

For organizing electronic tax records, you may use trusted software and/or programs. When storing tax documents in online storage spaces, ensure that the provider uses optimum security. Keep receipts of expenses separately for the corresponding year in a physical and an electronic folder to ensure they’re organized.

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