Why Storing Tax Returns Properly is Important
Properly storing your tax returns is essential for several reasons:
- Audit Preparedness: In case of an IRS audit, having your tax returns easily accessible can expedite the process.
- Future Financial Planning: Past tax returns can provide valuable insights into your financial history, aiding in better financial planning.
- Proof of Income: Tax returns often serve as proof of income for various financial applications, such as loans and mortgages.
How Long Should You Keep Your Tax Returns?
The IRS generally recommends keeping tax returns and any supporting documents for at least three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. However, there are different situations where you might need to keep records longer:
- Six Years: If you underreported your income by more than 25%, you should keep your tax returns for six years.
- Seven Years: For claims related to bad debt deduction or worthless securities, keep your records for seven years.
- Indefinitely: If you did not file a return or filed a fraudulent return, keep your records indefinitely.
Best Practices for Storing Tax Returns
1. Digital Storage
Storing your tax returns digitally is one of the most efficient and secure methods. Here are some tips:
- Scan Physical Documents: Use a high-quality scanner to digitize your paperwork.
- Save in Multiple Formats: Save your files in widely-accepted formats such as PDF for easy access.
- Use Cloud Storage: Services like Google Drive, Dropbox, or OneDrive offer secure cloud storage options.
- Backup Regularly: Always have a backup of your digital files on an external hard drive or another cloud service.
2. Physical Storage
If you prefer to store your tax returns in physical form, follow these guidelines:
- Use a Filing Cabinet: A fireproof and waterproof filing cabinet is ideal for storing important documents.
- Organize by Year: Label folders by tax year for easy retrieval.
- Secure Location: Keep your filing cabinet in a secure area, away from potential hazards like water damage or fire.
Combining Both Methods
For added security, consider combining both digital and physical storage methods. This ensures that you have multiple copies of your tax returns in various formats, making it easier to retrieve them when needed.
Implementing a Regular Review Cycle
Regularly review your stored tax returns and supporting documents to ensure they are up-to-date and securely stored. Make it a habit to review your records at least once a year, preferably after you file your new tax return.
Overall…
Proper storage of your tax returns is not just about compliance; it’s about safeguarding your financial future. By keeping your documents organized, secure, and accessible, you can ensure that you are prepared for any financial situation that comes your way.
