Tax Document Retention Requirements and Storage

With tax season just behind us, many people aren’t aware that the IRS has a set of guidelines regarding tax document retention. It’s recommended that individuals and businesses retain at least three years worth of tax documents. The IRS has three years to initiate an audit in most cases, but there are exceptions.

We spoke to Florida CPA, college instructor, and CEO of My Macro Memoir Jaclyn Strauss about these retention guidelines. We discuss a variety of topics that can help you be more prepared for any unexpected tax situations that may arise after filing. Check out the video below to hear what our tax expert has to say about tax document retention requirements.

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What are the Tax Document Retention Requirements?

Taxes Storage Drawer LabelThe old adage goes “nothing is certain in life except for death and taxes”. What isn’t as certain is the possibility of an audit. The IRS estimates that about 1 in 250 tax returns will be subjected to an audit each year. There are several ways that you can prepare for this, the most simple of which is retaining your tax records.

According to Jaclyn, “there is a rule of thumb, and that directive comes straight from the IRS”. That directive is three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. Now, those requirements do vary by state. For example, Texas and Colorado require its residents to retain four years worth of records. It’s advised to always check to see what your particular state requires.

Jaclyn is quick to mention that there are exceptions to these directives, just as there are exceptions across the entire tax code. In the event that you failed to file, or a fraudulent claim was filed, there is no statute of limitations. This is where digital storage can be particularly useful. You can retain several years worth of documents without leaving stacks of paper around your home or office.

Consequences of Not Retaining Tax Documents

PenaltyNot retaining tax documents puts you at the mercy of the IRS. Without proper documentation, you will have little to no chance of fighting an audit. In addition to the physical return itself, all support documents such as 1099’s, W2’s, and even receipts should be kept. Without proof of these expenses or gains, you will be unable to prove what you’ve claimed on your taxes.

Jaclyn recommends keeping both physical and digital copies of these documents. This way everything can be properly indexed and searched in the event your taxes are called into question. The consequences of failing to provide this information, could result in thousands of dollars in tax penalties or even criminal prosecution in extreme cases.

Types of Audits

implement audit accountability program evaluate rmsMany people believe that an audit is an audit, but Jaclyn informed us that there are actually three types of IRS audits. The first type is called a correspondence or mail audit. This is the most common and simplest in terms of fighting back. In a correspondence audit the IRS will simply reach out to you by mail for any missing or support documentation. If you can provide the documents needed, it’s often a simple fix that may or may not result in penalties. The average cost associated with a correspondence audit to the IRS is roughly $7,000.

The next type of audit is a field or office audit. This is where a representative from the IRS actually comes to your office to look at your documents or accounting records. This is much more serious, but it can also be combated with proper support documentation. Once an audit reaches this level, Jaclyn recommends enlisting the help of a tax professional or CPA. The consequences here can range from financial all the way up to criminal depending on the circumstances.

Last, but certainly the most serious, is what Jaclyn calls a line by line audit. This is exactly what it sounds like. In this instance the IRS is looking at your entire tax return line by line. This is typically reserved for cases of fraud or serious misrepresentation. With this type of audit, it’s also in your best interest to retain the help of a tax professional or professionals.

Solutions

Organized According to the experts, the best thing you can do is prepare. Retaining the minimum three years of your taxes physically and digitally, as well as communicating with those closest to you. Jaclyn says “whether that’s your loved ones or business partners” the best thing you can do is communicate. You don’t need to paint the whole picture, but just let people know where things can be found in the event they need to be.

Jaclyn says that this is vitally important, even in the event of a sudden death. Oftentimes older generations aren’t comfortable storing things online, in the cloud, or digitally. This demographic often feels more comfortable writing things down and storing them physically. Jaclyn says this is OK, but “just remind yourself where these things can be found”. Especially if someone else may need to find them in the event you’re unavailable to locate them yourself.

check listThere are many services out there that can help you manage these documents safely. From document storage to online cloud storage providers. Record Nations is partnered with some of the most state of the art businesses and facilities to help with all of your record management needs. Call us at (866) 385-3706, use our chat feature, or fill out the form, and we will help you find the right service at the right price in your neighborhood. It’s always best to be prepared. Let us put you on the right track for whatever may come your way.