How Long Should Tax Records Be Kept?

Tax records include documents and information that support the figures reported on your tax returns. These records are important for demonstrating tax compliance to federal and state authorities. Maintaining accurate tax records is essential for potential audits, preparing future tax returns, and supporting claims for credits or refunds. Proper record-keeping helps you verify income, deductions, and credits if questions arise from the Internal Revenue Service (IRS) or state tax agencies.

Standard Retention Periods

The IRS recommends keeping tax records due to the statute of limitations for audits. For most income tax returns, the standard retention period is three years from the date you filed your 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 audit that return. This three-year period is the general timeframe during which the IRS can assess additional tax you might owe or during which you can file an amended return to claim a refund or credit.

If you filed your return before the April 15 due date, the three-year period still begins on the April 15 due date. If you file an amended return to claim a credit or refund, you have three years from the date you filed the original return or two years from the date you paid the tax, whichever is later, to make that claim.

Situations Requiring Longer Retention

Some situations require keeping tax records for periods longer than the standard three years. If you omit more than 25% of your gross income from your tax return, the IRS has six years from the date you filed the return to assess additional tax.

If you claim a deduction for a loss from worthless securities or a bad debt, keep records for seven years. Documentation for worthless securities should show that the security is no longer traded, the company declared bankruptcy, or it has no market value.

In cases where you file a fraudulent return or fail to file a return at all, there is no statute of limitations, meaning the IRS can audit indefinitely. For employment tax records, such as those related to payroll taxes, employers must retain them for at least four years after the date the tax becomes due or is paid, whichever is later. This includes records of wages, tips, and tax deposits.

Records related to property, such as your home or investments, should be kept until the period of limitations expires for the year in which you dispose of the property. This is because these records are used to calculate depreciation, amortization, or depletion deductions, as well as the gain or loss when the property is sold. For property received in a nontaxable exchange, keep records of both the old and new property until the period of limitations expires for the year you dispose of the new property. This ensures you can determine the correct basis and any taxable gain or loss upon sale.

Types of Records to Keep

Tax records include various documents that support the income, deductions, and credits reported on your return. Income records include W-2 forms from employers, 1099 forms for income such as interest, dividends, or independent contractor payments, and K-1 forms from partnerships or S corporations. Bank statements showing interest or dividend payments also serve as income documentation.

Records supporting deductions and credits are important. This category includes receipts for itemized deductions like medical expenses, charitable contributions, or business expenses. For education or child care credits, you should retain statements and invoices that detail eligible expenses.

Investment records, such as purchase and sale confirmations for stocks, bonds, or mutual funds, are necessary to determine your cost basis and calculate any taxable gains or losses upon sale. Dividend reinvestment plan statements also fall into this category. For property, retain purchase documents, receipts for home improvements, and sale documents. Proof of payment, like canceled checks or bank statements, is also important to verify transactions and expenses.

Risks of Inadequate Record Keeping

Failing to maintain adequate tax records can lead to significant negative consequences. If your tax return is audited and you cannot provide sufficient documentation to support your claimed deductions or credits, the IRS may disallow them. This disallowance can result in a higher tax liability than originally reported, requiring you to pay additional taxes. The IRS may also issue an “Inadequate Records Notice” (Letter 979), signaling that your record-keeping practices are deficient.

Beyond increased tax liability, taxpayers may face penalties and interest charges for inadequate record-keeping. Penalties can be assessed for negligence or substantial understatement of tax, often amounting to 20% of the underpayment. Without proper documentation, it becomes difficult to prove income or expenses, prolonging the audit process and increasing stress.

Securely Disposing of Records

Once the required retention period for your tax records has expired, it is important to dispose of them securely to protect your personal and financial information. Simply throwing documents in the trash or recycling bin can expose sensitive data to identity theft. These documents often contain Social Security numbers, bank account details, and other private information that could be misused.

Shredding physical documents is a widely recommended method for secure disposal. Professional shredding services offer industrial-grade machines that cross-cut documents into tiny, irrecoverable pieces, providing a higher level of security than most home shredders. For digital files, securely deleting them means more than just moving them to the recycle bin; it involves using specialized software that overwrites the data, making it unrecoverable. Regularly reviewing your records and disposing of unneeded ones helps maintain privacy and prevents potential fraud.