The new year is a busy time for most Americans, many of whom take it as an opportunity to clean out old clothing, appliances and financial files for a fresh and organized start to the next 12 months. But when it comes to organizing and getting rid of old tax and related financial files, individuals shouldn't be too quick to toss old records simply because they think they may not use or need them again. The IRS has a three-year period to request information about old tax returns, or in some cases longer, and other records may serve as supporting documents in the event of a mistake or inaccuracy. For this reason, individuals should go through their files carefully and know what to keep and what can go.
As a general rule, avoid throwing out old tax returns after filing season has ended. The three year IRS rule typically applies to small mistakes on consumer tax returns. However, this audit period extends to six years if there are mistakes on more than 25 percent of the return, according to MarketWatch. More serious infractions may have no statute of limitations, the news source adds. For this reason, keep printed copies of all tax returns in a single folder or file cabinet. In addition to safeguarding them for IRS purposes, many lenders now request at least the previous three years of tax returns during the mortgage application process or when applying for a business loan.
It's also crucial to keep records proving ownership and worth of property, investments, collectibles and other assets, the news source explains. This information is crucial when claiming deductions or credits as well as when it comes to calculating the cost basis when selling the item. Further, having this information is important for insurance and estate planning purposes as well.
There are a number of items that can be tossed after a period of time, however, such as old bank and credit card records. These type of financial documents can be shredded after four to seven years, especially as many institutions now offer electronic alternatives and can pull up records if necessary. The same holds true for utility records, which can be shredded after a year period. For individuals who claim a home office deduction and write off a portion of their utility bills, it may be best to keep these records along with their corresponding tax returns.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.
About Liberty Tax Service
Liberty Tax Service is the fastest -growing retail tax preparation company in the industry’s history. Founded in 1997 by CEO John T. Hewitt, a pioneer in the tax industry, Liberty Tax Service has prepared over 8,000,000 individual income tax returns. With 42 years of tax industry experience, Hewitt stands as the most experienced CEO in the tax preparation business, having also founded Jackson Hewitt Tax Service. Liberty Tax Service
is the only tax franchise on the Forbes “Top 20 Franchises to Start,”
and ranks #1 of the tax franchises on the Entrepreneur “Franchise 500.” Each office provides computerized income tax preparation, electronic filing, and online filing through eSmart Tax.