You should be storing your tax records for at least three years after filing. However, not all storage methods are the same. Regardless of which storage method you choose, keeping your tax returns can help protect you in the long run. In the event that you ever get audited by the IRS, your past returns will act as proof for whatever information the IRS asks for.
If you want to store them physically, keep them somewhere secure, like a safe. However, scanning and keeping them online takes up less space and is more convenient in the event of an audit. There are multiple online options. You could store your tax records on a portable flash drive or USB drive, or you could upload them to whichever cloud you use (this could be iCloud, Google Drive, Dropbox, etc.). As long as the files are able to be read, the IRS will accept them.
Which Tax Records Should You Store For How Many Years, and Why?
At minimum, you should store most tax records for three years, but the longer you keep them the better. For example, you should keep records of employment taxes for four years. The number of years is even longer for other tax records you may want to keep. If you need to claim a deduction of worthless securities or bad debts, then you should keep records for that for seven years.
Here’s an example of a situation like that: say you lent your friend $10,000. After you lend them the money, they end up going bankrupt. You should keep records of that loan so that you can prove that they owe you $10,000. Otherwise, you might never get that money back. Of course, not everyone has situations like that.
Here’s another hypothetical situation that could save you money. Say you bought a car in 2010 and used it for work. Then, in 2020, you sold the car. You should keep every single car-related tax document that you filed throughout the years until you sell it.
In both of these scenarios, keeping the relevant documents ensures that you get the money you deserve and that you have the proof to back it up if you get audited.
What Would Lead To An IRS Audit?
Audits are rare, but they do happen. And there’s a variety of things that could trigger an IRS audit. The federal agency uses special software to “score” your tax return. If your score is higher, that means that you’re more likely to get audited. This is based on a couple of different things. For one, the system looks at how much money you make. Then, it estimates how many credits or deductions you might be able to claim. If the number of write-offs you have is greater than that estimate, your return will get flagged. Your return could also get flagged for an audit if you misreport how much income you’ve made. The numbers on your forms have to match up with what has been reported by your employer.
As long as you make sure your tax returns are error-free, you should be good to go. Regardless, it’s a good idea to save those tax records.