Final answer:
Taxpayers should retain records for refundable credits for at least three years from the filing date of their return, or longer in certain circumstances, such as seven years for bad debts or indefinitely for fraudulent or unfiled returns.
Step-by-step explanation:
The question relates to the retention of tax records for refundable credits, including the preparation of IRS Form 1040. The Internal Revenue Service (IRS) recommends that individuals keep their tax records, including documents related to refundable credits, for at least three years from the date they file their original return or two years from the date they paid the tax, whichever is later. However, if a taxpayer claims a loss from worthless securities or a bad debt deduction, the IRS advises keeping records for seven years. In cases of filing a fraudulent return or no return at all, records should be kept indefinitely.
In practice, variables such as the completion time for IRS Form 1040 and expenses for goods and services can affect recordkeeping habits. It is important to systematically document all financial transactions, not just those required by tax law but also personal expenses, to maintain a detailed financial history. This practice helps in the case of audits and can also provide insight into spending habits.