Now that tax season is nearing its end and you’ve got a copy of your newest tax return in hand, can you discard an older one to make space? The answer is a bit complicated.
Statute of limitations
The law says the IRS has a statute of limitations of three years from the date of filing of a return to assess additional taxes. This applies for normal circumstances, however, if you’ve underreported your income by 25% or more or claimed a loss on a bad debt, the statute of limitations is extended to six and seven years respectively. Once an assessment is issued for additional taxes owed, the IRS has ten years to try and collect. If you never filed a return for that year (whether you were exempt or not) or tax fraud occurred, there is no time limit on their ability to come knocking.
Connecticut laws follow the same time frames as the IRS. Special exceptions come in to play if an IRS assessment or an assessment from another state mean your Connecticut return for that tax year needs to be amended. If you file returns in other states, their time limits may be longer.
So how long should you keep those records?
The short answer is: keep your tax returns and documents supporting income, deductions, or credits and taxes paid for a minimum of six years. Year-end mutual fund and IRA contribution statements and records relating to the sale of real estate and other property should be kept at least six years after the account is emptied and closed or the property is sold.
The better answer is: if you can, go ahead and keep them forever. There’s no need to have a filing cabinet big enough for decades of tax paperwork though. Digital records are fine, provided you can print and produce a legible copy when requested. Scan your financial and tax paperwork and save it in an encrypted format on a flash drive or CD tucked away in your fireproof box, or to a secure cloud storage location. At the seven-year mark, after you’ve tucked away your digital copies go ahead and shred the hard copies.