How long should I keep my tax records?
Now that tax season is over, you're probably wondering what to do with all of your tax documents. Can you get rid of some of the old returns?
To be on the safe side, the answer is no. For your own protection-not to satisfy any possible Internal Revenue Service (IRS) liability-you should keep copies of all your tax returns and W-2s for life. Social Security and Medicare wages and taxes paid are reported to the Social Security Administration from IRS, but you don't see any evidence of this until you start receiving retirement Social Security benefit statements. While IRS has begun mailing these documents out annually, it may be too late to correct any discrepancies without proof of your lifelong earnings-through tax returns and either W-2s or check stubs.
Another reason to retain records is the statute of limitations for IRS audit, generally three years from the date returns are filed. Two exceptions exist, however. If you underreport your income by more than 25 percent, IRS officials can go back six years, while if you file a fraudulent return with the intent to evade tax, there is no time limit. Additionally, some states have longer statutes. With California, for example, returns are subject to audit up to four years after filing.
Therefore, it is a good idea to keep all backup documentation, including receipts and logs. The best way to track mileage is via a log, which can be easily kept on your daily calendar and referred to at year-end.
For most audits, the first things IRS representatives ask for are statements from checking, savings, and investment accounts. All deposits are balanced with the income reported on your tax return. If the deposits reflect a greater amount, it's up to you to explain the difference. Be sure to keep a record of all unusual, untaxable deposits so you won't be asked to pay tax on them later.