How Long Do You Need to Keep Tax Documents?

The records you keep are the foundation for the figures reported on your tax returns, serving as proof of income, expenses, deductions, and credits. Properly managing these documents is important, as they are the primary evidence required should the Internal Revenue Service (IRS) or a state agency have questions about your filing. Understanding the appropriate retention period ensures you are prepared for such inquiries and can effectively manage your financial history.

The General Retention Period

The IRS establishes a “period of limitations,” which is the timeframe during which you can amend a return to claim a refund or the agency can assess additional tax. For most taxpayers, the general rule is to keep tax records for three years. This three-year clock starts from the date you file your tax return.

If you file your return before the official due date, the IRS treats it as if it were filed on the due date itself. For example, if you filed your 2023 tax return early, the three-year period begins on the April 15, 2024, deadline. If you received an extension and filed on October 15, 2024, the period would start from that later date.

This guideline applies to documents that substantiate your return, including W-2s, 1099s, and receipts for deductions. The three-year rule also aligns with the period you have to file a claim for a credit or refund using Form 1040-X. You have three years from when you filed the original return, or two years from the date you paid the tax, whichever is later, to file an amended return.

Exceptions Requiring Longer Retention

While the three-year guideline covers most situations, several circumstances require you to hold onto your records for longer. A significant exception extends the retention period to six years if you have a “substantial understatement of income.” This occurs if you fail to report income that is more than 25% of the gross income shown on your return. This six-year period also applies if you overstate the tax basis of a property, resulting in a similar income understatement.

Another scenario involves claims for losses from worthless securities or bad debt deductions, which necessitates a seven-year retention period. The IRS allows seven years to file a claim for this type of loss, requiring you to keep the supporting documentation for that entire time.

For business owners with employees, employment tax records must be kept for at least four years after the date the tax becomes due or is paid, whichever is later. This applies to documents related to employee wages, tax deposits, and filings of forms like Form 941.

Records to Keep Indefinitely

Certain documents should be considered permanent records and kept indefinitely, as their relevance is not tied to a specific tax year’s audit period. Records related to property are a primary example. When you purchase a home, investment property, or other significant assets, you should keep the closing statements and receipts for any major improvements.

These documents establish the property’s tax basis, which is needed to calculate the capital gain or loss upon its sale. These records should be kept for as long as you own the property, plus at least three years after you sell it and report the transaction. Similarly, records of investments like stocks and bonds, including purchase confirmations and information on reinvested dividends, should be retained to establish your cost basis.

For retirement accounts, it is important to keep records of non-deductible contributions to a traditional IRA. These contributions are reported on Form 8606, and keeping these forms indefinitely provides proof that taxes have already been paid on that portion of your savings. Foundational business documents, such as articles of incorporation or partnership agreements, should also be kept permanently.

State-Specific Requirements

The record retention guidelines set by the IRS are for federal tax purposes only. Each state with an income tax has its own tax agency and its own set of rules, including the statute of limitations for conducting an audit.

While many states align with the IRS’s three-year period, some have a four-year or five-year period for assessing additional tax. The period can also be extended in cases of substantial income understatement, similar to federal rules.

Because these rules vary, it is advisable to check the specific requirements published by your state’s department of revenue. A practical approach is to retain all your tax documents for the longer of the federal or state retention periods to ensure compliance at all levels.

Storing and Disposing of Documents

The IRS accepts digital or electronic copies of documents, as long as they are legible and can be easily retrieved. Storing files digitally on a password-protected computer or in encrypted cloud storage can save space and improve organization, but it is important to create secure backups to prevent data loss. For those who prefer physical copies, storing them in a locked, fireproof safe or cabinet is a good practice.

Organizing records by tax year can make it much easier to locate a specific document if needed. Once a document’s retention period has expired, it is important to destroy it securely to protect against identity theft. It is recommended to use a cross-cut shredder for paper documents. For digital files, using secure deletion software that overwrites the data will ensure the information cannot be recovered.