How Many Years of Tax Returns Should I Keep?

Understanding tax record retention guidelines is important for individuals to manage their financial documents effectively. Proper record-keeping helps ensure compliance with tax regulations and can be beneficial if there are questions about past tax filings. Knowing which documents to keep and for how long helps avoid potential issues.

General Record Retention Period

The standard period for retaining most tax records is three years. This three-year timeframe begins from the date you filed your original tax return or the due date of the return, whichever is later. This period aligns with the Internal Revenue Service’s (IRS) statute of limitations for assessing additional tax.

During this three-year window, the IRS can examine your tax return and assess any additional taxes you might owe. Similarly, you also have this three-year period to amend your tax return to claim a refund or credit if you discover an error or overlooked deduction.

Extended Record Retention Periods

While a three-year retention period applies to most tax situations, several scenarios require keeping records for a longer duration. These extended periods exist to allow for longer audit windows when specific tax issues are present. Understanding these exceptions is important for proper tax planning and compliance.

If you omit more than 25% of your gross income from your tax return, the IRS has six years from the date the return was filed to assess additional tax. This extended period provides the IRS more time to identify significant underreported income. Therefore, you should retain all relevant records for at least six years in such circumstances.

For claims involving a loss from worthless securities or a deduction for bad debts, the retention period extends to seven years. This longer period is necessary because proving the worthlessness of a security or the validity of a bad debt deduction often requires extensive documentation over time.

If you fail to file a tax return for a year when one was required, there is no statute of limitations. Similarly, if a fraudulent tax return is filed, the IRS also has an unlimited period to pursue the matter. In these cases, it is advisable to keep all tax records indefinitely.

For employers, employment tax records must be kept for at least four years after the date the tax becomes due or is paid, whichever is later. These records include information such as employee names, addresses, Social Security numbers, wage payments, and tax deposits made. This retention period ensures that employers can provide necessary documentation if questions arise regarding payroll taxes.

Records related to the basis of property, such as a home or investments, should be kept for an extended period. These records should be retained until the period of limitations expires for the year in which you dispose of the property. This means holding onto documents like purchase agreements, closing statements, and records of capital improvements for several years after selling the asset. These documents are important for calculating any depreciation, amortization, or depletion deductions, and for determining the gain or loss when the property is sold.

If you have made nondeductible contributions to a traditional Individual Retirement Account (IRA) or converted a traditional IRA to a Roth IRA, you should keep records indefinitely. Form 8606, “Nondeductible IRAs,” is used to track your basis in these accounts, preventing you from being taxed again on amounts already taxed. You should retain copies of Form 8606 for every year you made nondeductible contributions or received distributions from an IRA if you previously made nondeductible contributions.

Supporting Documentation for Tax Returns

Beyond the tax return itself, it is important to keep all supporting documentation that validates the information reported. These documents provide proof for every item of income, deduction, or credit claimed on your return. Having these records readily available is important in case your return is selected for examination or if you receive an IRS notice.

Examples of essential supporting documents include Forms W-2 (Wage and Tax Statement), Forms 1099 (various income statements), and Schedule K-1s (Partner’s Share of Income, Deductions, Credits, etc.). Receipts for deductible expenses, canceled checks, bank statements, and brokerage statements are also important. These records should be organized and retained for the same duration as the tax return they support. This ensures you can substantiate all figures reported on your tax return, aligning with the retention periods discussed.

Disposing of Old Tax Records

Once the required retention period for your tax records has passed, it is appropriate to dispose of them. Proper disposal methods are necessary to protect your sensitive personal and financial information. Simply throwing documents in the trash can leave you vulnerable to identity theft.

Shredding paper documents is a recommended method for disposal, as it renders the information unreadable. Burning documents is another effective way to ensure that sensitive data cannot be reconstructed. For digital tax records, securely deleting files from your computer and any backup devices is important. This might involve using specialized software that overwrites the data multiple times, ensuring it cannot be recovered.