It is important to keep a file somewhere in your home or business that includes records from previous tax years. You should keep at least 3 years of records if you have not claimed any losses from bad debt deductions or worthless securities. Tuck a filing cabinet into a closet so it does not become an eyesore. Your records can be kept out of sight until they are needed.
Correcting Previous Returns
You may need to amend a tax return from a previous year. In this situation, you will need the tax records for whichever year you need to amend. Keeping your tax records in order and on hand will help you have easy access to the information required. You will be able to file your amendment faster and easier.
If you receive a notice of audit, you will need your records. You will also be expected to show proof of filing tax returns for 3 years prior to use as a comparison. The word audit alone instills fear in most people. The only time you have to worry about an audit is if you were trying to hide something. Otherwise, it just means that there is a mistake on your return.
Some financial institutions, including mortgage companies, may ask for W-2 and 1099 forms from previous tax years for income verification. If you already have the records available, it will be no trouble to provide them. It is ideal to keep these items together and organized by year.
These fears often end up being nothing to worry about to start with. When you do come across an issue with your taxes, be transparent with the IRS and cooperate. It will be a much easier process, and you’re likely to find that it isn’t really a big deal after all.
Image credit: Wilson Hui