Even though the Internal Revenue Service does not require that you maintain copies of tax records, there are a few things you should keep in mind when considering whether to shred your tax records. The IRS does provide some guidance based upon the existing statutes, and these should serve as your guidelines when you are deciding whether to file or shred tax records.
Any records which directly relate to a deduction, credit, or any other item or person claimed on a return, as well as prior-year tax returns, are considered tax records. Examples of tax records include receipts, bank records, canceled checks and documents that support income or losses. Tax records should be maintained so long as they may prove beneficial in substantiating prior return information or preparing future returns.
Statute of Limitations
Maintain copies of your personal tax records for so long as the statute of limitations has not expired. Generally, the IRS has three years from the date the return was filed to make additional tax assessments on the return. If no return was filed, then the IRS has three years from the due date of the return to make the assessment. Additionally, the IRS has 10 years from the date of tax assessment to collect the taxes owed. If you under reported your income by 25 percent or more, the IRS has six years from the time the return was filed to assess additional tax. The statute of limitations is seven years for returns where a loss is claimed from a worthless security.
In addition to saving your tax records for tax purposes, consider some of the non-tax purposes for maintaining copies of your tax records. If you run a business or you file bankruptcy, you may be required to show your tax records to your creditors or trustee. In situations where there is destruction of property or a natural disaster, your insurance company may request copies of your tax information. Be sure your tax records serve no non-tax purpose before shredding them.
If the IRS pulls your tax return for an audit, the agency may propose changes to your income tax return. If you do not agree with the proposed changes, you may be asked to provide documentation for some of the items listed on your tax return. The IRS will advise you as to what informaton must be provided to support the item or items listed on the return in your audit letter.