With tax season long over and the holidays approaching, many people are putting their records behind them and preparing their homes for gatherings with family and friends. For individuals who are cleaning out old documents and paperwork, it can be tempting to toss them in a box for storage or simply throw them away. However, it's a wise idea to keep some records for a certain period of time, especially if the IRS comes knocking or individuals are undergoing a major life event.
Taxpayers can adopt a simple approach to managing and organizing their records, and the first step is gathering all paperwork they have maintained in the past several years. Once they have this data collected, individuals should sift through each document and match it to the year in which it was filed to keep it organized. This may include 1099s, W-2s, withholding statements, retirement and investment accounts, deeds, receipts and invoices. Generally, most tax preparers recommend keeping tax returns and supporting documents for at least three years. This is the statute of limitations for IRS audits as well as for making corrections to tax paperwork.
There are some exceptions, however. The IRS may have up to six years to audit individuals who underpay their taxes by 25 percent or more, according to USA Today. Further, there is no statute of limitations on audits for individuals who fail to file a return. This means that for people who chose not to file on year, tossing old tax paperwork may not be a wise move. For those who have filed returns each year and have not previously been audited for serious tax issues, e-filers should still print out a copy of receipt acknowledgement to prove they filed on time. Those who file paper returns should send in their paperwork via certified mail and maintain all receipts as proof that they submitted their taxes.
Home seekers: Know your lenders tax requirements
Individuals who are planning to buy a home in the next several months should also expect a request from their lenders for their tax records. Each bank has its own requirements for how many years of tax records must be provided, with most lenders commonly requesting the last three years of returns. Understanding how many returns are necessary to apply for a mortgage can help buyers avoid tossing out necessary paperwork inadvertently.
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.