How Long to Keep Tax Returns and Supporting Documents

Retaining tax returns and their supporting documents is a fundamental responsibility for taxpayers. Proper record-keeping allows individuals to verify income, deductions, and credits reported on their tax forms. These records are also necessary for responding to potential inquiries or audits from tax authorities like the Internal Revenue Service (IRS).

General Tax Record Retention Periods

The general rule for retaining most tax records is three years. This period 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 2023 tax return on April 15, 2024, the three-year period would end on April 15, 2027. This timeframe aligns with the standard statute of limitations during which the IRS can audit your return and assess additional taxes.

For amended returns seeking a credit or refund, you generally have three years from the original filing date or two years from the tax payment date, whichever is later, to submit the amended return.

Situations Requiring Extended Retention

Certain situations necessitate keeping tax records for periods longer than the general three-year rule. One such scenario involves a substantial understatement of income, defined as omitting more than 25% of your gross income from your return. In these cases, the IRS has six years from the filing date to assess additional tax. This extended period also applies if you fail to report more than $5,000 of income from foreign financial assets.

Records should be kept indefinitely if you filed a fraudulent return or failed to file a return at all, as there is no statute of limitations for the IRS to assess tax in these circumstances. For specific situations like claiming a loss from worthless securities or a bad debt deduction, a seven-year retention period is recommended.

Documents related to property, such as your home, rental properties, or investments, require a longer retention period. These records, including purchase and sale documents and records of improvements, should be kept for as long as you own the property. After you sell or dispose of the property, you should retain these documents for at least three years from the date you filed the return reporting the disposition. These records are necessary to determine the property’s cost basis, calculate depreciation, amortization, or depletion deductions, and figure any gain or loss upon sale.

Supporting Documents to Retain

A range of supporting documents should be kept alongside your tax returns to substantiate the information reported. Income verification documents include Forms W-2, which report wages from employers, and various Forms 1099, such as 1099-INT for interest income, 1099-DIV for dividends, and 1099-NEC for freelance or independent contractor income. If you have self-employment income, you should also retain bank statements and records of all expenses. For investment activities, brokerage statements and Forms 1099-B, which report proceeds from broker transactions, are important.

For claimed deductions and credits, keep receipts, canceled checks, and other proof of payment. Examples include records for charitable contributions, mortgage interest payments reported on Form 1098, and eligible expenses for health savings accounts or 529 college savings plans. Records related to childcare expenses, education expenses, and medical expenses are also important if you claim associated credits or deductions.

Effective Storage Methods for Tax Records

Organizing and storing tax records effectively is important for accessibility and security. Both physical and digital storage options offer benefits. For physical documents, an organized filing system is beneficial. Label folders by tax year to ensure easy retrieval.

Storing paper documents in a secure, dry place, such as a fireproof and waterproof filing cabinet or a safe, protects them from potential hazards like fire, water damage, or theft. It is also recommended to inform a trusted individual, such as a spouse or family member, about the location of the key or combination for physical storage.

Digital storage provides convenience and can reduce clutter. Scanning physical documents into digital formats like PDFs allows for electronic storage. Secure cloud storage services, external hard drives, or secure document management software are options for digital files. Maintaining backups of digital files on multiple devices or cloud services is a sound practice. Password protection and encryption for digital files add a layer of security, preventing unauthorized access to sensitive financial information.