How Long Should You Hang Onto Your Federal Tax Returns?
Many people have this question, and there are so many different answers floating around out there that you might wonder which one is accurate. The reality is that you should probably hold onto your federal income tax returns for a lot longer than you may currently think is necessary. Many people operate under the assumption that three years is a safe bet. This thinking comes from the fact that the Internal Revenue Service has a maximum of three years to audit you and assess more taxes than you have already paid after filing any given tax return. If you file an amended return, keep in mind that the three years starts again at that point.
The problem with this three year idea is that the IRS is full of exceptions to virtually any rule that it publishes. An example is if the IRS discovers that you omitted (accidentally or intentionally, it does not matter) more than 25 percent of your actual income from any given year. If you did not include this on your tax return and the IRS finds out about it within six years, then they can go back and audit or assess additional taxes. You will want to have your tax return and any associated records handy in the event that this happens. If it is discovered that you filed a fraudulent federal tax return, then this means that there is actually no statute of limitations. The IRS can go back at any time in that case and request an audit.
While these are the two common exceptions, there are likely others as well. Even without those exceptions, the idea that you only need to hold onto your federal tax returns for three years is generally wrong. Imagine that you neglected to file a tax return on time or at all. This means that the statute of limitations, or the time that the IRS has to conduct an audit, never actually runs out. The only time the three year rule would apply in such a case is if you are able to prove that you actually filed the tax return in the first place. If the IRS ever says that it does not have a copy of your federal tax return, then you will need to prove that you have one. This is why it is so difficult to say how long for certain you should hang onto your federal tax return. That is such a tricky question to answer because, theoretically, the IRS could back in ten years and say that you never filed a tax return a decade ago. If you had already thrown all of the records out, then you be unable to prove that you had, in fact, filed the return. This leads one to conclude that it may be beneficial to hang onto every tax return that you have ever filed forever. Thankfully, digital filing and records that are available today make this easier to do than ever before.
There have been documented cases of individuals and businesses alike who have received letters about their tax returns from more than three years prior. These letters are stating that a tax return was never filed. If you never filed the return, then the IRS will use the information that they have and actually file it for you. If you do not owe any taxes, then this will not hurt you, other than the fact that they have been using your refund money for all these years without you knowing about it. You may get a refund if it is due to you, but you will not get any interest. The problem comes in if you did not file a tax return. They will then assess you the taxes owed, plus interest, plus a penalty for filing late. However, if you have a copy of the tax return that you filed and they somehow lost, then you will not have to worry about any of this. This is especially important if you have ever mailed a tax return. You do not know if the IRS received it in the first place, so you should just hang onto your records forever. It will not hurt you.
In summary, the odds of the IRS ever needing your tax return information more than three years into the future is still very low. However, there are enough cases where this rule does not apply that it just makes sense to keep the records. You can digitally in PDF form and it will not take up any space. The headache that it could potentially save you from years down the road will make it all worth it in the end.
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