How Long Must Tax Records Be Kept?

Keeping accurate tax records is essential for managing personal and business finances. These records verify income, deductions, and credits, especially if tax authorities audit your return. Maintaining documentation helps ensure compliance with tax laws and supports claims made on your tax forms. Understanding retention periods helps prevent penalties and prepares you for inquiries.

General Record Retention Period

For most tax situations, the general recommendation is to keep tax records for three years. This period begins from the date you filed your original tax return or two years from the date you paid the tax, whichever is later. This three-year timeframe aligns with the statute of limitations during which the tax authorities can audit a return or you can file an amended return to claim a refund or credit.

Extended Record Retention Periods

There are specific circumstances where tax records must be kept for periods longer than the general three-year rule. If you significantly underreport your gross income by more than 25% of the amount shown on your return, the retention period extends to six years. This extended timeframe allows the tax authorities to assess additional tax during that period.

For claims related to a loss from worthless securities or a bad debt deduction, you should retain all supporting documents for seven years. Worthless securities refer to stocks or bonds that have lost all market value, while a bad debt is money owed to you that cannot be collected. In cases where a fraudulent return was filed or if no return was submitted at all, there is no statute of limitations, meaning these records should be kept indefinitely.

Records pertaining to property, such as a home, investments, or rental property, need to be kept for as long as you own the property. You should also retain these records for at least three years after you dispose of the property. This extended retention helps calculate depreciation, amortization, or depletion deductions, and for determining the correct gain or loss when the property is sold. These property records include purchase documents, statements of improvements, and sale documents to establish the cost basis and calculate any taxable gain or loss.

Specific Types of Records to Retain

For tax purposes, a variety of documents should be retained to substantiate your income, deductions, and credits. Key income documents include Forms W-2, which report wages from employers, and various Forms 1099, such as those for interest (1099-INT), dividends (1099-DIV), retirement distributions (1099-R), and income from independent contractor work (1099-NEC). These forms are sent to you by January or February each year.

Records supporting deductions and credits are also important. This includes receipts for charitable contributions, medical expenses, and business expenses. Bank statements, canceled checks, and credit card statements serve as proof of payment for deductible expenses. Additionally, brokerage statements, K-1s from partnerships or S-corporations, and documentation for tax credits, like those for childcare or education expenses, should be kept.

Business and Employment Tax Records

Self-employed individuals and business owners have additional record-keeping requirements beyond those for personal taxes. These records help calculate self-employment tax, claim business deductions, and ensure compliance with specific business regulations. Business records include detailed income logs, expense receipts, and documentation for all business transactions.

Specific documents to retain for a business include payroll records, which must be kept for at least four years after the tax becomes due or is paid, whichever is later. This includes Forms 941, W-2s, and W-4s. Other important business records are asset depreciation schedules, expense logs for categories like travel and office supplies, mileage records for business travel, and sales records. Maintaining separate bank accounts for business and personal finances is also recommended to simplify record-keeping.