How long do tax records need to be kept?

Understanding how long to keep tax records is essential for financial compliance. Proper record-keeping ensures taxpayers can substantiate their income, deductions, and credits during an inquiry. Maintaining accurate records is crucial for preparing future tax returns, amending past filings, or responding to potential audits. This approach helps avoid penalties and ensures financial transparency.

Standard Retention Periods for Individuals

For most individual taxpayers, the general rule for retaining tax records is three years. This period begins from the date you filed your original return or the due date of the return, whichever is later. This timeframe aligns with the statute of limitations, during which the Internal Revenue Service (IRS) can assess additional tax or you can claim a credit or refund.

A longer retention period applies if you substantially underreport your gross income. If you omit more than 25% of your gross income from your tax return, the IRS has six years from the date the return was filed to assess additional tax. Common records under these rules include W-2 forms, 1099 forms, receipts for deductions claimed, and bank statements supporting income and expense entries. Keeping these documents for the appropriate period helps verify reported information.

Records Requiring Extended Retention

Certain records require retention for periods longer than the standard three or six years. Records related to the cost basis of property, such as homes, investments, or rental properties, should be kept as long as you own the asset. This includes documentation of the original purchase, any improvements made, and acquisition costs. Retain these records for at least three years after selling or disposing of the property to accurately calculate any capital gains or losses.

A seven-year retention period applies to records supporting a claim for a loss from worthless securities or a bad debt deduction. This extended timeframe allows for proper substantiation of such claims. Copies of W-2 forms and 1099 forms should be kept indefinitely, particularly for verifying Social Security earnings and benefits. While the Social Security Administration maintains its own records, your personal copies provide a direct reference if discrepancies arise.

Individuals who make nondeductible contributions to an Individual Retirement Arrangement (IRA) must retain Form 8606 and any supporting documentation. These records establish your cost basis in the IRA to determine the taxable portion of distributions. Keep these documents until all funds have been withdrawn from the account.

Business Record Retention Guidelines

Businesses have specific record-keeping requirements that often exceed those for individual taxpayers. Employment tax records, including payroll records, employee information, and tax forms like Form 940 and Form 941, must be retained for at least four years. This period begins from the date the tax becomes due or is paid, whichever is later. These records verify compliance with federal employment tax obligations.

Records pertaining to business property, such as fixed assets and real estate, should be kept for as long as the business owns the property. This includes documentation of purchase, sale, and any improvements. For depreciable assets, records must be maintained for the asset’s useful life plus the applicable tax retention period after its disposition or full depreciation. These documents help calculate depreciation deductions and determine gain or loss upon sale.

General business records, including sales receipts, purchase invoices, bank statements, and accounting ledgers, follow the same three-year or six-year rules as individual income tax records. These documents substantiate the business’s income and expenses. Businesses should also note that state and local tax laws may impose their own record retention requirements, which can be longer than federal guidelines.