Tax filing season for 2017 comes to an end today. There’s one question we frequently hear, both as we deliver our clients their file copies of the returns and at our Record Keeping meetings as well: “How long should I keep my tax returns?”
We often hear people talk about keeping returns for three years or seven years. But these recommendations seem to come from people repeating things other people have said, without any firm logic behind them.
We recommend our clients keep their returns indefinitely. While the IRS can normally go back only three tax years from the date the return was due or was actually filed, whichever is later, there is no statute of limitations on failure to file, or if there was willful tax evasion or the taxpayer filed a false or fraudulent return. (A six-year period applies if the taxpayer omits income in excess of 25% of gross income reported on the return.)
Now, you may know that you filed all your returns, and that you didn’t engage in any kind of fraud. But the question is not whether you know that’s true. It’s what an auditor might believe to be true. If you’re ever faced with this question, you might be very glad to have a large number of tax returns on hand.
So we recommend clients keep a box in their attic or crawlspace labeled something like, “Throw out three years after Mom and Dad die.” Keep a few years of returns (probably no more than five)in the file cabinet. And every year, as you add a return to the file cabinet, take the oldest one out and drop it into the box in the attic.
You’ll probably never need it, but if the IRS (or another taxing authority) should say, “You never filed a return in 2007,” you can show them the brittle, yellowed pages from your file copy.When could this come up? Unfortunately, the possibilities are endless. Perhaps some unrelated bad guy with a Social Security Number very similar to yours has the IRS mistakenly thinking you’ve done something wrong. How helpful would it be to have all your returns, to demonstrate that you're not the bad guy they’re looking for, and that you did indeed follow all the rules?
Sure, it can be annoying to keep all your old tax returns. But compared with the IRS claiming you did something you know you didn’t do and not having any way to prove it, we’re pretty sure most people would much prefer to keep a couple boxes in the far corner of the attic.