How Long Should You Keep Tax Records?

Proper record-keeping is crucial for verifying income, deductions, and credits reported on tax returns. These records provide necessary documentation for audits by the Internal Revenue Service (IRS) or other tax authorities. Without adequate records, taxpayers may face challenges substantiating claims, potentially leading to additional taxes, penalties, and interest fees.

Standard Retention Periods

The most common tax record retention period for most taxpayers is three years. This 3-year rule, formally known as the statute of limitations, is the timeframe during which the IRS can typically initiate an audit or assess additional tax. This period generally begins from the date you filed your original tax return or the due date of the return, whichever is later. For instance, if you filed your 2022 tax return by the April 15, 2023 deadline, the IRS generally has until April 15, 2026, to audit that return.

This standard three-year window applies to most routine cases where tax returns are accurate and complete. It allows taxpayers time to amend returns for credits or refunds and provides the IRS a period to verify filing accuracy. This guideline applies to salaried individuals and freelancers who have reported all earnings.

Extended Retention Periods

While the three-year rule covers many situations, exceptions require longer retention periods. If there is a substantial understatement of income, meaning more than 25% of the gross income shown on your return was not reported, the IRS can extend the audit period to six years. This period addresses significant discrepancies. For example, if your actual gross income was $200,000 but you only reported $149,000, the six-year rule could apply.

A seven-year retention period applies to records related to a claim for a loss from worthless securities or a bad debt deduction. Documentation, such as financial statements, bankruptcy filings, and correspondence from the issuing company, should be kept to support such claims. This period allows the IRS to scrutinize these deductions.

Records must be kept indefinitely if you filed a fraudulent return or failed to file a return. In these circumstances, there is no statute of limitations, meaning the IRS can initiate an audit at any time.

Records related to property, such as a home or investments, need to be kept until the period of limitations expires for the year you dispose of the property. These documents are for determining the cost basis, calculating depreciation, amortization, or depletion deductions, and figuring gain or loss when the property is sold. If property was received in a non-taxable exchange, records for both the old and new property must be retained until the new property is disposed of.

Key Tax Records to Keep

Taxpayers should retain documents to support figures reported on their tax returns. This includes copies of filed tax returns, such as Form 1040, for future filings and potential amendments. Income statements are important, including W-2 forms from employers and 1099 forms (e.g., 1099-INT for interest, 1099-DIV for dividends, 1099-MISC for miscellaneous income). These forms provide official summaries of income received.

Income documentation, like pay stubs and bank statements showing deposits, should also be kept. For any claimed deductions or credits, it is important to retain supporting receipts and documentation. This includes records for charitable contributions, medical expenses, business expenses, and education credits, along with cancelled checks or electronic payment records. Records of asset purchases and sales are for accurate basis calculation when determining capital gains or losses.

Organizing and Storing Records

Maintaining tax records in an organized manner aids retrieval and security. Taxpayers have options for both physical and digital storage. For physical records, using a fireproof and waterproof filing cabinet or secure boxes is a practice. Organizing documents by tax year and labeling folders clearly can streamline locating specific items.

Digital storage offers convenience and can be effective. The IRS accepts electronic copies of tax records, provided they are clear, legible, and accurately represent the original documents. Scanning paper documents into formats like PDF, GIF, or JPG is acceptable. Cloud storage services or external hard drives can be used for digital files, but creating regular backups protects against data loss. Securely storing digital files with strong passwords or encryption tools is also advised.