How Long Should You Keep Tax Records?

It is important to maintain tax records for various reasons, including supporting claims made on tax returns, preparing for future filings, and providing necessary documentation in case of an audit. The duration for which these records should be kept is not uniform; it varies significantly based on the type of record and specific financial circumstances. Understanding these retention periods helps individuals and businesses stay compliant with tax regulations and avoid potential issues.

The Standard Retention Period

The most common guideline for retaining tax records is three years, aligning with the statute of limitations for the Internal Revenue Service (IRS) to audit a tax return and assess additional tax. This three-year period begins from the date you filed your original return or the due date of the return, whichever is later. For instance, if you filed your 2023 tax return on April 15, 2024, the IRS has until April 15, 2027, to initiate an audit.

This standard retention period is sufficient for most taxpayers who have accurately reported their income and deductions. However, it is a minimum guideline, and many situations require keeping records for longer.

Extended Retention Periods for Specific Situations

Certain circumstances necessitate retaining tax records for periods longer than the standard three years. One such situation is when there is a substantial understatement of income. If you omit an amount of gross income that is more than 25% of the gross income reported on your tax return, the IRS has six years to assess additional tax. This extended period applies even if the underreported income was unintentional.

Another extended retention period applies to claims for a loss from worthless securities or a bad debt deduction. In these cases, you should keep relevant records for seven years. This is because the IRS allows a longer period for taxpayers to claim a credit or refund related to such losses, seven years from the date the original return for that year was due.

Records to Keep Indefinitely

Some tax records should be kept indefinitely due to the absence of a statute of limitations or their long-term financial implications. If you file a fraudulent return or fail to file a return at all, there is no statute of limitations, meaning the IRS can assess tax and penalties at any time. In such cases, retaining all related documentation permanently is important to defend against potential future actions by tax authorities.

Records pertaining to the basis of property, such as a home or investments, also require indefinite retention. These documents are important for calculating capital gains or losses when the property is eventually sold, which could be decades after the initial acquisition. This includes purchase agreements, improvement receipts, and closing statements for real estate, as well as brokerage statements for stocks and other investments. For example, home improvement receipts can increase your adjusted basis, potentially reducing capital gains tax upon sale.

Records of non-deductible contributions to a traditional Individual Retirement Account (IRA) should also be kept indefinitely. This helps establish your “basis” in the IRA and prevents double taxation on these amounts when you take distributions in retirement. IRS Form 8606 is used to report these non-deductible contributions, and retaining copies of this form each year is important.

What Documents to Retain

Maintaining a comprehensive set of documents is important for tax compliance and financial planning. Key documents to retain include:

• Income verification: W-2 forms from employers and various 1099 forms (e.g., for freelance work, interest, or dividends).
• Deductions and credits: Receipts, canceled checks, and other proof of payment for eligible expenses, such as medical expenses, charitable contributions, and business-related costs.
• Investment activities: Brokerage statements, buy and sell confirmations, and records of any reinvested dividends, as these affect your cost basis.
• Property records: Deeds, settlement statements from home purchases, and receipts for significant home improvements. These documents support the calculation of depreciation or capital gains/losses.
• Filed tax returns: Copies of your filed tax returns and all supporting schedules. These provide an overview of past tax filings and can be helpful for future returns or loan applications.

The IRS permits storing documents electronically, provided they are legible and can be reproduced.