Past Tax Returns

Many self-employed people or house based business owners like yourself, find that the amount of paperwork they hold onto for tax purposes is ridiculous! However, it is important that current tax returns, as well as some past tax returns are held onto – and that includes holding onto the relevant supporting paperwork too.

What are Tax Returns?

Firstly, an IRS tax return is the general name for the form used to file taxes payable to the federal or local government, which is filed with the IRS. This form includes information such as your gross income, allowable deductions, tax credits and tax that is due. As an individual taxpayer, you would file the Form 1040 on a calendar-year basis. Corporations should file the Form 1120 on either the calendar-year or fiscal-year basis. Also, tax returns must also be filed for partnerships using a Form 1065, estates with Form 706 and Form 709 is used for gifts you have received.

The IRS, or the Internal Revenue Service, is the federal agency that is responsible for administering and enforcing the American Treasury Department's revenue laws through the assessment and collection of taxes and other related procedures.

What Happens when You File Tax Returns?

Filing tax returns involve sending the tax return to the IRS once all the forms have been completed. You can file tax returns either manually or electronically, although electronic filing (or e-file) is generally encouraged over manually filing where possible. This is because there are many benefits for electronic filing, compared to manual filing. Electronic filing offers secure, paperless filing of your tax returns and ensures that your filing is delivered as you will receive electronic acknowledgement when it has done so. It allows you to avoid unnecessary trips to the post office and the possibility of the tax return getting lost or delayed.

Also, you are able to file federal and state taxes at the same time. Finally, electronic filing offers payment options like direct deposit, electronic fund withdrawal and allows you to file early but pay later too. E-file also keeps a secure record of all your tax returns, to ensure that you hold onto your current and past tax returns as required.

Holding onto Past Tax Returns.

You should make sure that your past tax returns are kept safe and organized, as the IRS may need to check your past tax returns from as long as six years ago if they need to audit you. For past tax returns you should hang onto any records that help you identify sources of income, keep track of expenses, determine the value of property, prepare the past tax returns or support claims made on those returns. Usually three years after filing a tax return, the chance of a tax audit passes, however, if the IRS suspects that you may have underreported your income by 25% or more in a tax return, they have six years to check into your tax life.

Generally, people are advised to hold onto past tax returns and any related documents for up to 10 years for this reason. Furthermore, if you have a pension plan, own your home or invest in the stock market, you should keep these records indefinitely (or for at least three years after you dispose of the asset).

Always remember how important it is to hold onto your current tax returns, some past tax returns and all the relevant supporting documents that go with them. It could just save your business come audit time.