When it comes to tax documents, it's not uncommon to find yourself wondering how long you should hold on to them. Whether you're an individual or a small business owner, organizing and storing tax records can feel overwhelming, especially if you're dealing with cumbersome stacks of paper. But how long do you need to keep these records, and should you stick with paper or switch to digital storage? Let's go over the best practices for keeping tax documents and what you need to know about staying prepared in case of an audit.
How Long Should You Keep Your Tax Documents?
The general rule for tax records is to keep them for at least three years because the IRS typically has a three-year window to audit your returns. However, depending on your situation, you may need to keep certain records longer.
Here's a quick guide on how long to keep different types of tax documents:
- Tax Returns: Keep a copy of your filed tax returns for at least three years from the date you filed or the due date of the return, whichever is later.
- Supporting Documents: Keep records like W-2s, 1099s, receipts for deductions, and other supporting documents for at least three years. If you have underreported your income by more than 25%, the IRS can audit you up to six years back, so keep those documents for a bit longer in such cases.
- Property and Asset Records: If you've bought or sold property, you'll want to keep related documents (such as settlement statements or mortgage interest records) for as long as you own the property, plus an additional three years after selling it. This approach helps support claims related to capital gains or losses.
- Business Records: If you're a small business owner, you'll need to keep detailed business records, including income and expenses, for at least three years. However, depending on the nature of the business, it may be wise to store them for six years or more.
Paper vs. Digital: Which is Best?
While many people are accustomed to keeping stacks of paper records, digital storage has become an increasingly popular option. But is it safe to store your tax documents digitally, and what's the best method?
- Paper Documents: Keeping paper records is fine if that's what you're comfortable with. However, paper can take up space and can be vulnerable to damage from fire, floods, or other disasters. If you prefer paper, store documents in a safe place, such as a fireproof box or filing cabinet.
- Digital Documents: Switching to digital storage can help save space and offer peace of mind. Digital files can be stored in the cloud or on encrypted drives, protecting them from physical harm while giving you access when needed. If you decide to go digital, use secure passwords and encrypt sensitive files to prevent unauthorized access.
- Hybrid Approach: Some individuals and businesses prefer to keep both digital and paper copies. This approach gives you the flexibility of having immediate access to digital files while still maintaining hard copies for backup.
Why Keeping Tax Documents Matters
Keeping organized tax records is essential for several reasons. First and foremost, they serve as proof in case of an audit. If the IRS or your state tax authority has questions about your returns, you must provide supporting documents to verify your income, deductions, and credits. Additionally, these records are valuable for future financial planning, particularly when it comes to tracking investments or property sales.
The All-Digital Approach: Convenience and Security
At Myrick CPA, we understand the importance of maintaining organized tax records, so we have transitioned to an all-digital approach. We provide all our services electronically, so instead of bringing paper documents to in-person meetings, our clients upload them securely through our client portal. Our system ensures that everything is appropriately documented and stored in one convenient location. Whether you have paper records or digital files, just upload your documents, and we'll take care of the rest.
Ready to organize your tax records? Contact Myrick CPA to schedule a consultation. Let us help you keep your tax documents secure, accessible, and audit-ready.
