How Long Do You Need to Keep Tax Returns?

Tax returns and their supporting documents are important records for individuals and businesses. Proper record-keeping is beneficial for tax compliance, providing necessary information during an audit, and for effective financial planning. Understanding how long to keep these records and which documents are essential helps ensure you are prepared for various financial situations. This guide covers typical retention periods and practical tips for managing tax paperwork.

Standard Retention Periods

The Internal Revenue Service (IRS) advises keeping tax returns and supporting documents for at least three years. This three-year period begins from the date you filed the original return or the due date of the return, whichever is later. For example, if you filed your 2022 tax return on April 15, 2023, the IRS has until April 15, 2026, to conduct an audit. This timeframe aligns with the IRS’s statute of limitations for assessing additional tax.

This three-year rule allows both taxpayers to amend a return for a refund and the IRS to audit or assess additional tax. The purpose of these standard retention guidelines is to ensure you have the necessary documentation if your return is selected for examination or if you need to make changes to a previously filed return.

There are specific situations where a longer retention period applies. If you claim a deduction for a loss from worthless securities or a bad debt, you should keep related records for seven years.

Situations Requiring Longer Retention

Some situations require longer retention periods. If you omit more than 25% of your gross income from your tax return, the IRS has six years to assess additional tax. This extended period applies to the entire return, not just the omitted items, allowing the IRS more time to question and assess other reported items. An example would be reporting $60,000 in gross income but failing to include $20,000, which exceeds the 25% threshold.

If you fail to file a tax return, or if you file a fraudulent return, there is no statute of limitations. This means the IRS can assess tax and penalties at any time in the future, making indefinite retention of all relevant records advisable. For employment tax records, such as those for Forms 941, W-2s, and W-4s, employers must keep them for at least four years from the date the tax became due or was paid, whichever is later. This four-year rule is a legal requirement under IRS regulation 26 CFR 31.6001-1.

Records related to property, such as a home or investments like stocks, should be kept for a long duration. You should retain these records until the period of limitations expires for the year in which you dispose of the property. This means keeping records for as long as you own the asset, plus an additional three years after you sell or otherwise dispose of it and report the transaction on your tax return. These documents are important for calculating the asset’s basis, determining depreciation, and figuring any gain or loss when the property is sold.

Supporting Documents for Your Records

Maintaining a variety of supporting documents alongside your tax returns is important for substantiating the information reported. Income statements, such as W-2 forms from employers and various 1099 forms (e.g., 1099-INT for interest, 1099-DIV for dividends, 1099-MISC for miscellaneous income, and 1099-NEC for nonemployee compensation), are important to verify your earnings. K-1 forms, received from partnerships, S corporations, or trusts, also fall into this category.

Receipts for deductions, such as charitable contributions, medical expenses, and business-related costs, are important for substantiating claims made on your return. Bank statements, canceled checks, and credit card statements provide proof of payment and can verify income or deductions. These documents are important because they support the entries in your books and on your tax return, helping to provide answers if your return is selected for examination.

Record Keeping Practices

Effective record-keeping involves organizing and storing your tax documents for accessibility and security. For physical documents, creating a filing system organized by tax year, using labeled folders, and storing them in a safe place like a file cabinet or fireproof box is recommended. Organizing documents by category within each year, such as income, deductions, and investments, can also simplify retrieval.

Digital storage offers an alternative or supplementary method, allowing you to scan physical documents and save them electronically. These digital files can be stored on a hard drive, external drive, or cloud storage, but it is important to use a secure, password-protected system. Regular backups are important to protect against data loss, ensuring your records remain intact.

Keeping records readily accessible is important in case they are needed for an audit or other financial purposes. Once the retention period for specific documents has passed, secure disposal is recommended to protect sensitive personal information. Shredding physical documents and securely deleting digital files prevents identity theft and fraud. Professional shredding services offer a highly secure method for disposing of large volumes of sensitive papers.