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Keeping vital financial records is important in order to make sure you can handle potential issues in the future. Yet once most people file their tax returns, the last thing they want to think about is whether they might have to refer back to them at some point. You need to keep tax returns for at least a few years to make sure that the Internal Revenue Service doesn't have any issues with them, but beyond that, many people wonder how long they should keep holding onto old returns.

Why do I need to keep tax returns at all?

Many people figure that once they've filed their returns, there's little reason to keep them. However, at the very least, the reason to hold onto your tax returns is that the IRS can come back and challenge what you've put on your return. You want to be prepared if an IRS audit comes your way, and not even having your tax return will make you look less than well-prepared for an audit.

In most cases, the IRS has three years to audit your tax return, starting on either the filing deadline or the date on which you file your return, whichever is later. Therefore, if you filed your 2012 tax return in a timely manner, then the IRS probably no longer has the ability to audit it, because the return was due on April 15, 2013, and three years have passed since then.

However, there are some situations in which the IRS can audit you later. The most common occurs when you underreport income by at least 25%, in which case the IRS has six years to audit you rather than three. If you never file a return or if your return is fraudulent, then there's no statute of limitations, and the IRS can audit you no matter how much time has gone by. In addition, if you've claimed a loss from worthless securities, a seven-year period applies.

How long should I keep tax returns after the audit period expires?

Even once you're in the clear from an audit standpoint, keeping your tax returns longer can be a smart move. For example, if you have bought shares of a particular stock or fund on multiple occasions and then decide to sell some of those shares, the return on which you claim your capital gain or loss will have vital basis information that'll need in order to prepare future returns when you decide to sell the rest of your shares. Without your original return, it will be more difficult for you to take a consistent position and avoid scrutiny.

In addition, having your tax returns can be useful in making sure you get all the retirement benefits that you're due from Social Security. The Social Security Administration looks at your entire work history and picks the 35 years in which you had the highest earnings, after adjusting for inflation. If the SSA gets something wrong, then having your tax returns can help you establish what the appropriate earnings you had in a given year were, and that in turn be the key to get you all the benefits that you deserve.

Should I keep tax returns for any other reason?

There are also some non-tax reasons to keep old tax returns. In some cases, if you go to a bank to get a loan, your lender might want to see your tax returns from the past several years in order to establish that you have a steady and reliable income. That's especially important for those who own their own businesses or are self-employed, because they won't have W-2 forms that lenders can refer to instead.

Finally, your tax return can be the easiest way to get a snapshot of your finances for a particular year. By tracking your tax returns over the years, you can detect trends in earnings from your job, investment income, and other sources. That can help you plan better for the future, giving you a more informed sense of what you should budget for and what you can expect going forward when it comes to handling your money.

Keeping your tax returns might seem like a hassle, but there are many reasons why you should. Keeping the IRS happy and generally giving you a big-picture view of your finances are both valuable things that you can accomplish simply by stashing those old returns somewhere safe.

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