There's some relief after sending off your tax return and knowing there's another 12 months before you need to do this again. But before you close that tax file, there is still some work to do. If the IRS or state revenue department selects your return for review, you will need to be prepared. Here is what you need to know:
Record keeping tips
As long as they are needed. The IRS says you should retain documentation for as long as they are needed to support your tax return. Normally tax records should be kept for three years from the later of the tax filing due date, the date you filed your taxes, or the date you paid your tax in full. But be careful, others may want it for a longer period of time.
Some documents should be saved indefinitely:
Your tax return
Records related to a home purchase or sale
Stock transactions
Business/Rental records
The IRS does not require any special record keeping system. You just need to keep all documents that can support information on your tax return. Here are common records worth retaining:
Canceled checks
Invoices
Other proof of payment for claimed deductions
Bank and credit card statements
Mileage logs
Receipts with time, place, and purpose noted
Be mindful of other record retention requirements
State record retention requirements are often 6 months to 1 year longer than Federal requirements.
Social Security records often need to be proofed to ensure they match your pay stubs
Insurance, banking, and estate management may require other records
Federal retention requirements become 6 years if your return understates your tax obligation by more than 25%, and the record retention period is indefinite if fraud is involved.
Maintain a good system
So the build up of paperwork does not overwhelm your storage space, at the end of the tax year rotate your records. Decide how many years of records must be retained. Then count back from your current tax return filing year and shred unneeded, older documentation.
Create new empty files for the current tax year to save receipts for the coming year. Consider scanning records to keep digital copies. A final word of caution, if you are unsure whether to retain or shred, keep it unless you know the document can be replaced.