As the October 15, 2024, filing deadline for tax extensions rapidly approaches, millions of Americans are scrambling to ensure their 2023 returns are filed accurately and on time. The IRS extension gives you more time to prepare your documents, but it doesn’t alleviate the requirement to keep certain tax-related records for a specified period.
How long should you keep tax records?
The length of time you need to keep your records depends on several factors, primarily the type of tax filing and your financial situation. The IRS has specific guidelines:
- General rule: (3 years)The IRS generally recommends that you hold onto your tax returns and supporting documentation for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. This is the period in which the IRS typically has the right to audit your returns. During this time, you should keep records such as W-2s, 1099 forms, receipts for deductions, and any statements related to taxable income.
- Extended time: (6 years) There are certain scenarios where the IRS suggests keeping your records for six years. If you underreported your income by more than 25%, the IRS can go back six years to audit your returns. This is particularly important for self-employed individuals or those with complex tax situations involving capital gains, rental properties, or foreign accounts.
- Indefinitely for fraud or Non-filing: If you fail to file a return or commit tax fraud, there’s no statute of limitations, meaning the IRS can audit you indefinitely. In these rare situations, it’s wise to keep your tax documents indefinitely as a safeguard.
- Property and investments: For records related to property and investments, such as real estate or stock, you’ll want to hold onto documents as long as you own the asset, plus an additional three years. This includes keeping purchase and sale records, as well as any documents related to depreciation or improvements, which can affect the capital gains tax when you sell the asset.
Why record keeping is important for extensions
If you were one of the many taxpayers who requested an extension using IRS Form 4868, your deadline to file a 2023 tax return is now October 15, 2024. While the extension gives you more time to file your tax return, it doesn’t extend the deadline to pay any taxes you owe. This distinction is critical: if you didn’t pay your tax bill by April 15, 2024, you may be subject to penalties and interest.
Even though filing for an extension moves the deadline, the IRS expects meticulous record-keeping. You’ll need these records not only to accurately file your return but also to protect yourself in case the IRS questions your return later. Here’s why keeping these records for the recommended period is essential:
- Audit protection: If the IRS audits your return within the specified period, you’ll need to provide proof of the income, credits, or deductions claimed. Not having proper documentation can lead to additional taxes, penalties, and interest. In most cases, audits occur within three years, but this can extend up to six years depending on the circumstances.
- Disaster recovery: If you lose your records due to a disaster (e.g., fire, flood), the IRS has specific procedures in place to recover information. Having a backup plan—such as digital copies stored in the cloud—can prevent major headaches down the road.
- Filing corrections: Mistakes happen, and sometimes you may need to file an amended tax return. Having your previous records on hand makes it much easier to correct any errors in your original filing without further penalties.
What happens if you miss the October 15 deadline?
If you fail to file your taxes by the October 15, 2024, extension deadline, several consequences may follow:
- Late filing penalties: The IRS can impose a penalty of 5% of your unpaid taxes for each month (or part of a month) your return is late, up to a maximum of 25%.
- Late payment penalties: If you didn’t pay at least 90% of your tax bill by the April 15 deadline, you could face a late-payment penalty of 0.5% per month on the unpaid amount.
- Interest: Interest on your unpaid tax bill begins accruing immediately after the April deadline. The longer you wait, the more costly it becomes.
