How Long Should You Hold Tax Returns?

Keeping accurate tax records is essential for individuals and businesses. Proper documentation ensures compliance with tax laws and provides evidence if the Internal Revenue Service (IRS) has questions about a filed return. Understanding the appropriate retention duration simplifies future tax preparations and offers protection during an audit.

Understanding IRS Retention Periods

The Internal Revenue Service has a specific timeframe, known as the statute of limitations, during which it can assess additional tax, make a refund, or take collection action. For most taxpayers, the IRS can audit your return and assess additional tax for up to three years from the later of the tax return’s due date or the date you filed it. This three-year period applies if you underreported your gross income by less than 25% of the gross income stated on your return. If you failed to report income correctly, resulting in a substantial understatement of gross income, this period extends to six years.

A longer seven-year retention period applies if you file a claim for a loss from worthless securities or a bad debt deduction. There are certain circumstances where records should be kept indefinitely. These include cases where you do not file a return, or if you file a fraudulent return. In such situations, the statute of limitations for assessment does not expire. You should also retain records for claiming a refund for a specific period. Generally, 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 claim a credit or refund.

Key Documents to Keep with Your Returns

Beyond the filed tax return, supporting documents are essential for substantiating reported information. These records verify income, deductions, and credits, providing a complete audit trail.

You should retain all income statements, such as:
Forms W-2, Wage and Tax Statement, received from employers
Various Forms 1099, including 1099-INT for interest income, 1099-DIV for dividends, and 1099-MISC for miscellaneous income
Schedule K-1 forms from partnerships, S corporations, and trusts, if you have investments

Records supporting deductions and credits are equally important, including:
Receipts for charitable contributions, medical expenses, and business deductions
Bank statements, canceled checks, and brokerage statements to corroborate income and expense transactions
Any other documents used to prepare your tax return, such as property tax statements or educational expense records, should be kept for at least as long as the corresponding tax return.

Business and Special Record Retention

Businesses have more extensive record-keeping requirements than individuals, tied to payroll, asset management, and tax obligations. Maintaining detailed records is important for accurate financial reporting and federal compliance.

Employment tax records, including payroll records and Forms 941 (Employer’s Quarterly Federal Tax Return) or 944 (Employer’s Annual Federal Tax Return), must be kept for at least four years after the date the tax becomes due or is paid, whichever is later. Records related to assets, such as depreciation schedules, purchase receipts, and records of improvements, should be retained for the asset’s useful life plus the relevant statute of limitations after its disposition. This ensures proper tracking of basis and gain or loss on sale.

Individuals also have special scenarios requiring extended record retention, particularly concerning property. Records related to the basis of property, such as a home, investments, or other significant assets, should be kept indefinitely. These documents are necessary to calculate gain or loss when the property is eventually sold, and must be retained until the statute of limitations expires for the year of the sale. Records of contributions to and distributions from retirement plans should also be kept until all funds have been distributed and the statute of limitations for the final distribution year has passed.

Secure Storage and Disposal Methods

Once you understand retention periods, establish secure storage methods for your tax records. Both physical and digital options safeguard sensitive financial information. The right method depends on your preference for accessibility and security.

For physical documents, a locked filing cabinet or a fireproof safe provides protection against theft, damage, and unauthorized access. Organizing these documents by tax year can simplify retrieval. Digital storage offers convenience and can include scanned copies saved to an external hard drive, encrypted cloud services, or secure online document management systems. Implement robust security measures, such as strong passwords and multi-factor authentication, for all digital records and maintain regular backups to prevent data loss.

After the applicable retention period, safely dispose of your tax documents to protect personal information. Physical documents should be shredded to prevent identity theft. For digital files, secure deletion methods, such as overwriting data multiple times or using specialized software, ensure information cannot be recovered. Simply deleting files from a computer’s trash bin is often not sufficient for complete data removal.