Record of income: Tax documents, such as W-2s and 1099s, provide a record of your income. These are crucial for accurately reporting your earnings to the IRS and referring back to them in case of an audit.
Qualification for deductions and credits: Supporting documents, like receipts, financial statements and expense reports help verify deductions and credits claimed on your tax return. Keeping these records is essential in case of an audit.
Proof of filing: Retaining a copy of your filed tax return serves as proof that you complied with your tax obligations for a specific year. Because not filing has severe financial ramifications, retaining proof protects you from penalties and fines.
Audit protection: The IRS may audit your tax return within a fixed timeframe (typically three years), and having the necessary documents on hand can help you substantiate your income and deductions.
Claiming refunds: If you later discover that you are eligible for a refund or credit, the original documents will be necessary to file an amended return. Your window for claiming refunds is three years at the federal level (state statutes for refunds vary).
Documentation for loans and financial transactions: Lenders may require tax returns as part of the documentation for mortgage applications or other loans. Tax documents are helpful in these situations.
Estate and inheritance purposes: Tax documents may be needed for estate planning, inheritance, or other financial planning purposes.