In case you ever get audited, it is best to save your tax records, instead of throwing them out. Unfortunately, this can result to keeping more documents and papers than you really have to save. But most people have absolutely no clue whatsoever when it comes to knowing how long they need to save tax records before they can finally dispose of them and throw them into the trash. There is the fear that the IRS might come knocking when old tax records are disposed of. So what's the honest truth when it comes to which tax records you must to store? How long before you can totally throw them away and not worry about any potential IRS issues?
The statute of limitations officially set by the Internal Revenue Service is the first criteria. The IRS can audit your tax records within 10 years. They can no longer collect those taxes or audit those returns after that. This statute of limitations is put in place because realistically, records can get lost. Your IRS issues essentially disappear after 10 years, even if you can no longer pursue refunds after this period.
The second criteria you'll want to use as a guide is the three-year rule. Basically, the assessment of additional taxes has a statute of limitations for three years. For instance, if you want any more money from a refund, the 3-year period begins from the date you submitted the original tax return. However, this rule has a few exceptions. For instance, the limitations period will actually be six years if you only reported a percentage of your total income and the unreported amount is 25% of the the income reported. Another exception is when you decide to claim a loss on a worthless security. This has a limitation period of 7 years. Lastly, if you decide to not file a return, or just file a tax return which in fact is actually fraudulent, then there's no statute of limitations. The IRS can then pursue you anytime.
Before you throw documents out, examine your odds of being audited. If an audit is a possibility, then it's best to store documents that would support your case like employment, brokerage, and bank statements, capital losses and gains, tax returns, business records, and expenses on your home for the entire ten-year statute of limitations period. This is your protection against IRS problems.