How Many Years of Taxes Do You Have to Keep?

Tax records are important for verifying income, deductions, and credits reported to the tax authorities. Maintaining organized records helps prepare future tax returns, supports claims for refunds, and provides necessary documentation in case of an audit. Failure to maintain proper records can lead to penalties and challenges in verifying financial information.

Standard Record Retention Period

The standard period for retaining tax records is three years. This timeframe 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 Internal Revenue Service (IRS) has until April 15, 2027, to audit that return.

This three-year period is known as the “statute of limitations” for assessments, meaning the IRS cannot assess additional tax after this time. If you file your return before the official due date, the three-year period still starts from the due date. Similarly, if you file an amended return to claim a refund, you have three years from the date you filed the original return or two years from the date you paid the tax, whichever is later.

Situations Requiring Longer Retention

Certain situations necessitate keeping tax records for longer than the standard three years, extending the period during which the IRS can review your returns. These exceptions are important to understand.

If you substantially understate your gross income, omitting more than 25% of the gross income reported on your tax return, the statute of limitations extends to six years. This six-year period allows the IRS more time to assess additional taxes, penalties, and interest on the unreported income.

A longer retention period applies for specific deductions. If you claim a deduction for a bad debt or a loss from worthless securities, you should keep related records for seven years. This extended period is due to the nature of these losses, which can sometimes be claimed years after the initial transaction.

Records should be kept indefinitely in certain cases. If you file a fraudulent return or fail to file a return at all, there is no statute of limitations, allowing the IRS to assess tax at any time. In such cases, maintain all tax and supporting documents permanently.

Records related to property, such as your home or investments, have specific retention rules. You should keep these records for as long as you own the asset, plus the standard three-year period after you sell or dispose of it. These documents are necessary to calculate any depreciation, amortization, or gain or loss when the property is sold.

Documents to Keep

Maintaining a comprehensive set of documents supports the information reported on your tax return and helps respond to potential inquiries. These records substantiate your income, deductions, and credits.

Retain all income statements, including Forms W-2, Forms 1099, and Forms K-1. Other income documentation, such as bank statements showing interest or dividends, and records of rental income or capital gains, are also important.

Receipts for deductible expenses are necessary. This includes documentation for charitable contributions, medical expenses, and business-related costs like travel, supplies, or equipment. Canceled checks, credit card statements, and invoices further support these expenditures.

Records pertaining to investments and real estate are also necessary. Keep purchase and sale agreements, closing documents for property transactions, and records of any improvements made to assets. Brokerage statements and records of retirement account contributions and distributions should also be retained.

Organizing Your Tax Records

Effective organization of tax records can simplify tax preparation and document retrieval. You can choose between physical or digital storage methods, or a combination of both, as long as the system is clear and accessible.

For physical documents, using folders or binders categorized by type of document or by tax year is effective. Labeling folders clearly and storing them in a secure location, such as a filing cabinet or fireproof box, helps protect sensitive information.

When opting for digital storage, scan paper documents to convert them into electronic files. Organize these digital files in folders on your computer or an external hard drive, using descriptive file names. Regularly backing up digital files to a cloud service or another secure location prevents data loss.