I need all the space I can get and would love to dispose of some 15 cartons filled with my old tax records. Is it safe to throw them away? If not, how many years of back returns should I keep?
Technically, your tax file remains open with the Internal Revenue Service for only three years. But, there are many reasons to justify keeping your tax returns, receipts and support documents for at least five years:
1. The IRS can automatically audit your returns for each of the last three years. If your return of three years ago is audited, your tax records from the prior years may help you demonstrate a prior pattern of claims for expenses, deductions, contributions, etc.
2. You may want to file an amended return for any or all of the last three years because you find it beneficial to use a different tax calculation method, such as itemizing; or you have discovered tax-deductible expenses you forgot to include in previous returns; or, you have uncovered a tax advantage that was overlooked. If you amend your return for Year 3, previous returns may be useful.
3. Once the three years are up, the IRS may request the privilege of keeping your files open for one additional year at a time. You have the legal right to refuse, but in most instances it is to your advantage to consent, because saying no will often trigger an immediate audit of any or all of your tax returns for the last three years, and saying yes does not necessarily mean that an audit will be conducted.
If you have given the IRS permission to hold your files open for an extra year, you'll obviously want to keep your own records for that additional year, as well as for the two previous years.
* If the IRS suspects a failure to report at least 25 percent of gross income, it can examine returns from the past six years.
* If fraud is discovered, the IRS can reopen and re-examine tax records going all the way back to the first return.
Of course, certain records should never be thrown out. These include receipts for home improvements and records of investment purchases. In fact, any document that substantiates property enhancement, tax cost or original purchase price of assets should be kept until the asset or property is sold and taxable profits and losses are calculated.
Any papers relating to home ownership, past or present, should be kept until you use the once-in-a-lifetime exemption on $125,000 of profits from the sale of your home. This exemption can only be used after age 55.