Tax Return Explained: How to File and Keep Records

A tax return is an official document individuals and businesses file each year to report income, claim deductions and credits, and determine whether they owe taxes or are entitled to a refund. Employees, freelancers, and small business owners all rely on tax returns to stay compliant with tax laws, document income, and support important financial decisions.

This guide will cover:

• What a tax return is and how it works
• The different types of tax returns
• How tax returns are filed and corrected
• IRS record retention rules
• Common mistakes that delay refunds or trigger penalties

Before we get into the details: accurate tax filing depends on reliable financial records. Using invoicing software throughout the year helps track income as it’s earned, making tax preparation faster and reducing the risk of errors when filing.

What Is a Tax Return?

A tax return reports your income and financial activity for a specific tax year and calculates how much tax you owe or how much you’ll receive as a refund. In the U.S., most individuals file Form 1040, while businesses and self-employed taxpayers file additional schedules or separate returns.

Beyond calculating taxes, tax returns also:

• Serve as proof of income
• Support loan, rental, and financial aid applications
• Create a record for audits or amendments
• Establish compliance with federal and state tax laws

Even taxpayers with low or no income may benefit from filing to claim refundable credits or preserve eligibility for future benefits.

Understanding Tax Returns

Every tax return is built from financial records created throughout the year. Income totals, deductible expenses, and credits all come from invoices, receipts, payroll records, and bank statements—not estimates or guesses.

For freelancers and contractors, consistent bookkeeping is especially important. Following best practices (outlined in our article on small business bookkeeping) helps ensure income is reported accurately and deductions are supported if the IRS ever requests documentation.

Types of Tax Returns

Individual Tax Returns

Most individuals file Form 1040 or 1040-SR to report wages, interest, dividends, and other personal income. These returns determine taxable income and eligibility for credits.

Adjusted gross income plays a central role in this calculation because it’s the income baseline used before applying deductions. Many credits and deductions phase out as AGI increases, which can directly affect refund size and tax owed.

Self-Employed and Freelancer Tax Returns

Self-employed taxpayers report business income and expenses separately using Schedule C and calculate Social Security and Medicare taxes through Schedule SE.

Because self-employment tax covers both the employer and employee portions, it often results in a higher tax bill than expected. 

Many self-employed taxpayers are also required to make quarterly estimated tax payments to avoid penalties.

Pro Tip: Understanding Schedule SE and how to calculate self-employment tax helps freelancers anticipate these costs and plan ahead.

Small Business Tax Returns

Small business tax returns vary based on how the business is structured, and each structure comes with different reporting requirements and responsibilities.

• Partnerships file Form 1065 to report business income, deductions, and credits. The partnership itself doesn’t pay income tax, but it must issue Schedule K-1 forms showing each partner’s share of profits or losses, which are then reported on individual returns.
  
• Corporations file either Form 1120 or Form 1120-S, depending on whether they are taxed as a C corporation or an S corporation. C corporations pay taxes at the business level, while S corporations pass income through to owners, similar to partnerships.
  

Regardless of structure, accurate reporting depends on having reliable financial records throughout the year. Business tax returns are built from income totals, categorized expenses, depreciation schedules, payroll data, and year-end account balances. Missing or inconsistent records can lead to misreported income, disallowed deductions, or delays if the return is reviewed.

The Sections of a Tax Return

Income

The income section reports all taxable income, including wages, freelance payments, business revenue, interest, and dividends. Missing income is one of the most common reasons tax returns are audited.

Consistent invoicing and proper invoice payments tracking help ensure reported income matches what was actually received.

Adjustments and Deductions

Adjustments reduce income before deductions are applied, while deductions reduce taxable income directly. Common deductions include mortgage interest, charitable contributions, and business expenses.

For self-employed taxpayers, deductions like mileage must be documented. Tracking business mileage for tax deductions ensures these expenses are defensible if reviewed.

Tax Credits

Tax credits reduce the amount of tax you owe dollar for dollar, which makes them more valuable than deductions that only lower taxable income. A $1,000 credit reduces your tax bill by $1,000, regardless of your tax bracket.

Eligibility for tax credits often depends on several factors, including income thresholds, filing status, and household details such as dependents or education expenses. Many credits begin to phase out once income reaches certain levels, meaning that even modest changes in reported income can affect whether a credit applies or how much it’s worth.

Because of these phaseouts, accurate income reporting is critical. Reporting additional income—even unintentionally—can reduce or eliminate a credit entirely. This is especially important for self-employed taxpayers whose income may fluctuate year to year, as well as households claiming education or child-related credits where eligibility rules are more strict.

Payments and Refunds

This section reconciles taxes already paid through withholding or estimated payments with your total tax liability to determine whether you owe additional tax or are entitled to a refund. It reflects the final outcome of everything reported earlier on the return.

Some taxpayers choose a tax refund advance, which is a short-term loan based on an expected refund. While this can provide quicker access to cash, it often comes with fees or interest that reduce the amount you ultimately receive.

How to File a Tax Return

Filing a Tax Return Online

Electronic filing is the fastest and most accurate way to submit a tax return. According to the IRS, e-filed returns are processed more quickly and are far less likely to contain calculation or transcription errors than paper returns. Most refunds for electronically filed returns are issued within a few weeks.

Before filing, it’s important to confirm that income totals are complete and accurate. Reliable records reduce the chance of mismatches that can delay processing or trigger rejection. 

Accepting payments through online payments helps ensure income reported on a tax return matches what was actually received during the year.

Filing a Tax Return by Mail

Paper filing is still an option, but it typically results in longer processing times and slower refunds. Paper returns must be signed, include all required schedules and attachments, and be mailed to the correct IRS address based on location and filing status.

Because paper returns are reviewed manually, even small errors (such as missing signatures or incomplete forms) can lead to significant delays. For taxpayers expecting a refund, mailing a return can add weeks or even months to processing time.

What to Do If Your Tax Return Is Rejected

Tax return rejections are most commonly caused by mismatched personal information, incorrect Social Security numbers, or incorrect adjusted gross income entries used for identity verification. Rejections can also occur if income totals don’t align with IRS records.

When a return is rejected, the IRS provides a reason code explaining the issue. Correcting the error and resubmitting electronically usually resolves the problem quickly, often within days, without affecting refund eligibility.

Amending a Tax Return

When You Need to File an Amended Tax Return

An amended tax return is required when information on a previously filed return was incorrect or incomplete. This includes situations where income was underreported, deductions or credits were missed, or the wrong filing status was selected. Amendments are also necessary if you later receive corrected tax documents, such as an updated Form 1099 or W-2.

Not every change requires an amendment. Math errors are usually corrected automatically by the IRS, and missing forms may be requested separately. For changes that affect tax liability or refund amounts, the IRS outlines when and how to amend under Topic 308 Amended Returns.

How to File an Amended Tax Return Online

For recent tax years, amended returns can be filed electronically, which is faster and easier to track than mailing a paper Form 1040-X. Electronic filing reduces processing delays and allows the IRS to confirm receipt more quickly.

Even when filing online, supporting documentation should be retained in case the amendment is reviewed. Processing times for amended returns are typically longer than original filings, but electronic submission generally results in fewer delays than paper amendments.

IRS Record Retention Rules

How Long Should You Save Tax Returns?

In most cases, the IRS recommends keeping tax returns and related records for at least three years from the date the return was filed. This timeframe generally covers the standard audit window and allows time to correct errors or respond to questions.

How Many Years of Tax Returns to Keep

The appropriate retention period depends on your filing situation and income reporting history:

• Three years is sufficient for most accurately filed returns.
• Six years is recommended if income was underreported by a significant amount, since the IRS has a longer window to assess additional tax.
• Indefinitely applies if a return was never filed or if fraud is involved.

Pro Tip: The IRS provides detailed guidance on how long to keep records, including examples for individuals, freelancers, and small business owners. Following these timelines helps ensure records are available when needed without keeping documents longer than necessary.

Other Uses for Tax Returns

Tax returns are frequently requested for:

• Loan applications
• Rental approvals
• Financial aid
• Government assistance programs
• Opening financial accounts
• Personal finance planning

In many cases, an IRS transcript is sufficient. Tax transcripts summarize key return data without providing the full filing.

What Documents Should You Keep With Your Tax Returns?

Supporting documents include invoices, receipts, mileage logs, bank statements, and prior-year returns. Organizing these records using a ledger and detailed record of transactions makes long-term storage and retrieval easier.

Federal vs State Tax Return Record Retention

Federal record retention rules set the baseline, but state tax agencies may require records to be kept longer, particularly for business income, sales tax filings, or state-specific credits. This matters most for small business owners, freelancers working across state lines, and taxpayers who relocate.

Keeping state returns and supporting documents for at least as long as federal records (and longer if required by your state) helps avoid issues if a state tax authority reviews prior filings or requests documentation years later.

Physical vs Digital Copies of Tax Returns

The IRS accepts digital copies of tax returns as long as they are complete, readable, and securely stored. Digital records make it easier to retrieve documents quickly for audits, amendments, or income verification requests.

However, paper copies can still be useful for older returns or situations where original signatures or mailed correspondence are involved. Keeping digital copies as the primary record, with paper backups for critical years, balances accessibility with protection against data loss.

Common Tax Return Mistakes to Avoid

• Forgetting income sources
• Claiming unsupported deductions
• Filing late without an extension
• Poor documentation

Consistent recordkeeping throughout the year reduces these risks significantly.

Ready to File Your Tax Return With Confidence?

Tax returns are easier to manage when income is tracked accurately and records are organized year-round. Clear documentation reduces errors, shortens filing time, and makes it easier to respond if questions come up after a return is submitted.Invoice Fly helps freelancers and small business owners stay prepared long before tax season arrives. Using invoicing software to track income, online payments to record when you get paid, and creates a clean paper trail that supports accurate tax returns and fewer surprises at filing time.