How Many Years of Back Taxes Should I Keep?

Tax record keeping is a fundamental aspect of financial management. Maintaining accurate records is necessary for compliance with tax laws. Proper record keeping allows for accurate tax return preparation, supports claimed deductions and credits, and provides documentation if tax authorities inquire about a return. This practice helps ensure financial accountability and can prevent penalties or complications.

Standard Tax Record Retention Periods

The Internal Revenue Service (IRS) establishes specific periods for record retention. For most individuals, the general rule is to keep tax returns and supporting documents for at least three years from the date the original return was filed or the due date of the return, whichever is later. This three-year timeframe is the statute of limitations, during which the IRS can audit a return or assess additional taxes. This period also allows taxpayers to file an amended return to claim a refund if an overpayment is discovered.

An extended retention period applies when there’s an omission of income. If a taxpayer omits more than 25% of their gross income from a tax return, the IRS has six years from the filing date to assess additional tax. This longer period allows the IRS to investigate returns with significant discrepancies in reported income.

Special Circumstances for Keeping Records Longer

Beyond standard retention periods, certain circumstances necessitate keeping tax records for extended or indefinite durations. If a taxpayer files a fraudulent return or fails to file a return, there is no statute of limitations, meaning the IRS can audit or assess taxes at any time. In such cases, retaining records indefinitely is important for future inquiries.

Records related to the basis of property, such as real estate or investments, should be kept for as long as the property is owned and for at least three years after its disposition. These records are necessary for calculating depreciation, amortization, or depletion deductions, and for determining capital gains or losses when the property is sold. For inherited property, records should detail the value at the time of inheritance and any prior owner’s basis.

Records concerning non-deductible IRA contributions (e.g., Roth IRAs) should be retained indefinitely. This documentation proves that contributions were made with after-tax dollars, preventing them from being taxed again upon withdrawal in retirement. Records for claims of worthless securities or bad debt deductions should be kept for seven years. For those who employ household staff, employment tax records must be retained for at least four years after the tax was due or paid, whichever is later.

Types of Records to Retain

A variety of documents should be kept to support information reported on tax returns.

Income Records

Income records include:
W-2 forms from employers
1099 forms (such as 1099-INT for interest, 1099-DIV for dividends, and 1099-B for proceeds from brokerage transactions)
K-1 forms from partnerships or S corporations
Bank statements for income verification

Deduction and Credit Records

Records supporting deductions and credits include:
Receipts for itemized deductions like medical expenses, charitable contributions, and mortgage interest
Documentation for education expenses, such as Form 1098-T
Child care expenses, including receipts or provider statements

These records provide the evidence needed to substantiate claims made on the tax return.

Investment and Property Records

Investment records include purchase and sale confirmations for stocks, bonds, and other securities, along with brokerage statements. These are important for tracking cost basis and calculating capital gains or losses. Records of dividend reinvestment plans should also be kept to adjust the cost basis of investments.

For property, documents include:
Purchase agreements
Closing statements
Receipts for significant home improvements
Depreciation schedules for rental properties

Safeguarding and Disposing of Records

Proper management of tax records involves secure storage and responsible disposal. Taxpayers can choose between physical and digital storage methods, or a combination. Physical records, such as paper documents, can be organized in filing cabinets, ideally fireproof and waterproof, to protect against damage. Digital storage involves scanning paper documents into electronic files and saving them on secure hard drives or cloud storage services. The IRS accepts digital records if they are legible and easily accessible.

Regardless of the storage method, security is important. For digital files, password protection, encryption, and regular backups to multiple locations are important. Cloud storage offers off-site backup, which protects against local disasters. For physical records, a locked cabinet or safe in a secure location helps prevent unauthorized access or loss.

Once the applicable retention period has passed, records should be disposed of securely to protect personal information. Simply throwing away sensitive documents can expose individuals to identity theft. Physical documents should be shredded using a cross-cut or micro-cut shredder, or through a professional shredding service. Digital files should be securely deleted using data-wiping software, and old hard drives should be physically destroyed to ensure data cannot be recovered.