How long to hold on to tax returns?

Although you probably don't want to think about doing your 2007 tax return now, I like the end of the year because it means I can wrap up my record-keeping for the year in preparation for a probable tax refund. Once I get the W-2 forms in January, I'm ready to send in my paperwork to my accountant and wait for good news. Generally we get notice of refunds by the first week of February (I've told you I'm not normal!).

I also love that I can throw away yet another year's return and file of paperwork. While 7 years seems to be the most common guideline we all hear as to how long to keep tax paperwork, my accountant said 3 years. Most clients don't trust that number so we operate with the 7-yr rule when purging, and I suggest that they consult with their accountant.

According to most online research on the topic, "there is a three year statute of limitations for the IRS to assess a tax and impose a penalty on the taxpayer. Once this three-year period has elapsed and the IRS is no longer permitted to examine your returns for a particular year, you can dispose of that year's records. You should note that the three years begins when the tax return is due; if you filed early, the due date is still the target date." Of course there are some situations that require holding on longer to pertinent paperwork, but for the typical consumer, this applies.

For a more specific explanation and all the exceptions, see the IRS section on this topic. This information may come in handy before April!