A common question for Maryland tax attorneys is, “How long should I keep my tax returns?” Some do not expect or what to hear my answer. While many tax professionals, even the
Those saying a certain number of years base it upon IRS statute of limitations deadlines. The IRS can audit a return after it’s been filed for less than 3 years. The IRS can audit a return for 6 years if there is a “substantial understatement”, and there is no statute of limitations if there’s fraud. You may think, I’ve never committed fraud, so I’m safe at least after six years. But that’s not the end of the story.
My thought on keeping tax documents forever has nothing to do with fraud. First, in today’s world everyone has access to a scanner and ridiculously cheap electronic storage, so there’s little reason to destroy your tax records.
Now, the reasons you need to keep your tax documents.
First, let’s discuss the reason applicable to everyone. I know it’s shocking, but the US Postal Service occasionally does not deliver mail as promised, and, even when it does, there’s no guarantee the IRS or the Comptroller of Maryland will process your return. I can’t count the number of times clients that file on time every year have called in a panic because they received a letter from the IRS or Maryland Comptroller demanding they file a long past due return. If you destroyed the tax return and your records and substantiation for that year, good luck recreating the return and proving your deductions. Of course, if you receive a refund for that tax year or some other form of confirmation, you are safe to assume the IRS or Maryland Comptroller received your return. But there are still other situations when you may need to refer back to those returns.
Occasionally there’s a need to refer back to older tax returns. For example, maybe your company issued you stock and you later need to show the taxes you paid and basis you established at that time. Another example would be for certain elections, like the “real estate professional’ aggregation election. Not being able to produce the return in which you made that election could cause serious tax issues in later years. Then, there are also some situations where you may want to show the IRS that you have consistently reported transactions in the same manner. The carryover information found in old returns can also be needed in the future. Finally, in addition to being able to provide proof to the IRS or Maryland Comptroller, there are countless non-tax situations where having income tax information can be useful.
If you are thinking you can always retrieve the information from the IRS, getting older tax returns from the IRS is very difficult. If the tax return was filed within the last three to four years, you can easily get at least a digital transcript for your tax returns and information reported to the IRS through W2’s, 1099’s and similar. For older information, the task is extremely difficult and almost impossible. To retrieve your older documents you will need to send the IRS a completed Form 4506 and a check for its filing fee. But, after numerous calls to the IRS to check on the status, you will finally realize they are never sending it to you. On the bright side, they don’t cash your check until they send you your return. I’ve never had them cash a check yet.
Therefore, I suggest just keeping your returns and tax records. The risks from throwing them away are just too great and there’s little reason not to just keep a digital copy indefinitely.
For further information regarding tax documentation, please contact Jeff Rogyom at (410) 929-4578.
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