Tax documents are used to document information in compliance with the IT Act, 1961, and the rules therein. Retention of tax documents is important for taxpayers, as it would enable them to claim refunds and act as conclusive evidence that they have filed the tax return. It is advisable to retain the documents at least once for a period of three years and a maximum of up to seven years. As far as it is concerned, any taxpayer who is running a business has to maintain tax documents along with employment tax records. However, in some exceptional circumstances, taxpayers are required to maintain tax documents forever. These circumstances may include not filing the tax return on time and any attempted fraud in tax filing. Additionally, if a taxpayer has opted for a Tax advance, it is crucial to keep all related documentation for future reference, as it may be needed to verify the advance amount or during any audits.
WHY SHOULD YOU KEEP YOUR TAX DOCUMENT?
The maintenance and storage of tax documents are necessary to provide proof of compliance with legal requirements. It is perceived as a good practice for storing tax documents to meet any future needs. There are following reasons for storing tax documents are given below:
1] Record of Income: The taxpayer needs to report their earnings accurately to the IRS. Tax documents will provide a basis for a record of your earnings, which may be significant in case of an audit.
2] Proof of Filing: As discussed above retention of tax document acts as evidence that the taxpayer has complied with all the legal provisions. As it is crucial because not filing of returns may attract penalties and interest.
3]Audit Protection: As per SA 200 an audit is an independent examination of a financial statement, irrespective of its size or nature or legal form, to express an opinion on the financial statement of an entity. The IRS may require an audit of your tax return at any stipulated period (generally three years), and having regard to the necessary document may provide proof of your earnings and deductions.
4] Estate and Inheritance Purposes: The usage of tax documents may also be required for planning of estate, inheritance or any other related financial planning.
5] Qualifications for Deductions and Credits: Possession of supporting document shall facilitate to verify the deductions and refunds claimed on your return. Thus, it is indispensable to keep tax documents.
WHAT TAX RECORDS SHOULD YOU KEEP?
There are the following tax documents you need to keep to substantiate your tax returns. These are invoices, W-2s, Payroll documents, Deposit slips, mileage logs, and 1099s.
TIPS FOR STORING TAX DOCUMENTS
The best place for you to store your tax documents will be a fireproof safe. This ensures that the tax documents are not destroyed. In addition to this, you can also make electronic backups on your computer.
CONCLUSION
It is vital to all the taxpayer in understanding the retention period of tax documents which may range from minimum three years to maximum 7 years. The retention period may also change as required.
