How Many Years of Taxes Do You Keep?
Understand how long to keep tax records for compliance, financial planning, and future needs.
Tax record keeping is an important aspect of personal financial management, extending beyond the annual filing deadline. Maintaining proper documentation allows individuals to substantiate reported income, deductions, and credits if questions arise. It also provides a historical financial record valuable for various future needs, and understanding how long to keep these records helps ensure compliance and peace of mind.
IRS Record Retention Guidelines
The Internal Revenue Service (IRS) establishes specific periods during which it can audit a tax return or assess additional taxes, called the statute of limitations. For most taxpayers, this period is three years from the date the original return was filed or its due date, whichever is later. For example, if a 2022 tax return was filed on April 15, 2023, the IRS generally has until April 15, 2026, to initiate an audit.
If there is a substantial understatement of income, defined as omitting more than 25% of the gross income reported on the return, the IRS has six years to conduct an audit. This extended period applies whether the understatement was intentional or not. Additionally, for cases involving the filing of a fraudulent return or the complete failure to file a return, there is no statute of limitations, meaning the IRS can examine those tax years indefinitely.
Note that if a claim for a credit or refund is filed after the original return, records should be kept for three years from the date the original return was filed, or two years from the date the tax was paid, whichever is later. For a claim of loss from worthless securities or bad debt deduction, the retention period is seven years. Businesses should retain employment tax records for at least four years after the tax was due or paid.
What Tax Records to Retain
To support information reported on a tax return, individuals should retain various documents. These include income statements such as Forms W-2 from employers and Forms 1099 for non-employment income like interest, dividends, or independent contractor payments. Bank and brokerage statements are important for verifying income and financial transactions.
Documentation for deductions and credits claimed on a return should be kept. This includes receipts, invoices, and canceled checks or bank statements proving payment for deductible expenses like medical costs, charitable contributions, or business-related outlays. Records related to home ownership, such as closing statements, property tax assessments, and receipts for home improvements, are relevant. Investment records, including purchase and sale confirmations, are necessary to substantiate the cost basis of assets and calculate any gain or loss when sold.
Other Reasons for Keeping Records
Beyond potential IRS scrutiny, tax records serve several other financial purposes. Detailed records of property purchases, sales, and improvements are essential for determining an asset’s cost basis. When a home or investment property is sold, accurate cost basis information helps calculate any taxable gain or allowable loss. These records should be kept for several years after the property is disposed of.
Tax returns and supporting documents are frequently requested for non-tax-related financial applications. Lenders require several years of tax returns when individuals apply for mortgages, student loans, or other forms of credit to assess creditworthiness and income stability. Tax records are important for verifying income and work history when calculating Social Security benefits. Maintaining these records supports personal financial planning and provides a comprehensive financial history.
Managing and Disposing of Tax Records
Effective management of tax records involves organizing them for easy accessibility. Individuals often organize documents by tax year, creating separate folders or digital files for each period. Both physical and electronic storage methods are acceptable, provided records are accurate, legible, and readily available.
Once retention periods have passed, disposing of sensitive tax documents securely is important to protect personal information. Physical documents containing Social Security numbers, financial account details, or other private data should be shredded. For digital files, use secure deletion methods. Before discarding any tax-related documents, confirm all applicable retention periods have been met for both tax and non-tax purposes.