Taxpayers often ask, "When is it safe to discard tax records?" or "How long dues the IRS have to make changes in my tax return?" These are complex questions for which there are no generalized answers. A quick answer given without sufficient detail, can lead to the premature destruction of valuable tax records.
Most times the tax records that apply to a specific year must be kept for only three years after the due date of that year's return. However, those tax records most likely will include a few records which you are required to preserve for a longer period of time.
The following information provides a number of good reasons for maintaining certain records longer than others.
Federal Statute of Limitations
With some exceptions noted below, the statute of limitations for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. For example, if you filed your 1992 return on March 1, 1993 (before the due date of the return), the statute of limitations will expire on April 15, 1996, three years from the due date of the return. However, if you file your 1992 return on May 1, 1993 (after the due date of the return), then the statute of limitations on assessments expires May 1, 1996 - three years from the filing date of the return.
The IRS provides state tax authorities with IRS audit results and therefore many states make adjustments based on the IRS results. For that reason, the statute of limitations for most states is usually one year longer than the federal.
Exceptions to the Three-Year Rule
There are some exceptions to the three-year rule which allow the IRS additional time to make assessments:
If none of these exceptions applies to you, for federal purposes you can probably discard most of your income tax records that are more than three years old. For instance, if you filed your 1991 tax return before the April 15, 1992 due date, then most of your records can be disposed of after April 15, 1995. If you filed your 1991 tax return after the due date – say June 1, 1992, then you shouldn't dispose of any records until at feast dune 1, 1995. You probably should wait an additional year or two, however, if your state has a longer statute of limitations.
Some Records Should be Kept Longer
There are some exceptions to the 3-year rule-of-thumb, and certain records need to be held for much longer periods of time.
As a safeguard, it's a good idea to keep copies of your tax returns and W-2's forever. Although the IRS has a policy of destroying the original returns within a few years after they are filed, many tax situations require reference to a prior year's return.
For example, your eligibility for and the amount of future social security benefits will depend on your past wages and self-employment income. The Social Security Administration (SSA) keeps a record of your income. If their records are not correct, you may not receive the future benefits you are enticed to unless you have records to substantiate your position.
Studies prove that about 6% of the information the SSA receives on taxpayers' income is incorrect. One recent court decision indicated that if the taxpayer had been able to show copies of tax returns from the disputed years, the court might have ruled that SSA correct the taxpayer's earning records. This would have increased his social security benefits.
The purpose of this article is to provide general information on tax, financial and business matters. It suggests general tax planning ideas that may be appropriate in certain situations. The information and opinions are generalizations and may not apply to all taxpayers; It is important that you seek appropriate professional advice before implementing any of the tax ideas suggested.
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