How Many Years Should Tax Returns Be Kept?

Properly managing tax records is important for verifying past filings, ensuring compliance with tax regulations, and responding to inquiries from tax authorities. This practice also aids personal financial planning by providing a clear history of income and expenses. Understanding how long to keep these records helps individuals and businesses avoid potential issues and maintain accurate financial oversight. This article provides guidance on the appropriate retention periods for various tax-related documents.

General Retention Guidelines

The Internal Revenue Service (IRS) recommends keeping tax returns and supporting documents for three years from the date you filed your original return or the due date, whichever is later. This three-year period is the most common statute of limitations for the IRS to assess additional tax. For example, if you filed your 2024 tax return on April 15, 2025, the IRS has until April 15, 2028, to initiate an audit or assess additional tax. This timeframe allows tax authorities to review the accuracy of reported income, deductions, and credits.

Specific situations extend this three-year period. If you omit more than 25% of your gross income from your tax return, the statute of limitations increases to six years. This longer period allows the IRS to discover significant underreporting of income and investigate substantial discrepancies.

Certain circumstances necessitate keeping records indefinitely. If you file a fraudulent return or do not file a return at all, there is no statute of limitations. This means the IRS can assess tax, penalties, and interest at any point in the future, making indefinite record retention prudent.

A seven-year retention period applies if you claim a loss from worthless securities or a bad debt deduction. These deductions often involve complex financial situations, requiring extended verification time for the IRS to examine their validity.

Records related to property, such as your home or investments, should be kept for as long as you own the property, plus the applicable statute of limitations for the year you dispose of it. These documents prove the original cost, improvements, and other adjustments that determine your basis, affecting capital gains or losses upon sale. Records supporting the basis of investments, like stocks or mutual funds, should be retained until at least seven years after the investment is sold to accurately calculate gains or losses.

What Documents to Retain

Beyond the tax return itself, various supporting documents are important to retain. These include:

• Wage and tax statements, such as Forms W-2, to verify reported employment income.
• Forms 1099, including 1099-NEC for nonemployee compensation, 1099-INT for interest, 1099-DIV for dividends, and 1099-B for broker transactions, to substantiate other income.
• Schedule K-1 forms, reporting income, losses, and deductions from partnerships, S corporations, or trusts, for those with business interests or investments.
• Receipts for deductible expenses, such as medical expenses, charitable contributions, and business-related costs, to provide evidence for claimed deductions during an audit.
• Bank and credit card statements, if they contain tax-related transactions, to trace income or expense items.
• Mileage logs, to substantiate vehicle expense deductions for business or medical travel.
• Investment statements, particularly purchase and sale records, to calculate capital gains or losses when assets are sold.
• Proof of payments, such as records of estimated tax payments, to verify fulfilled tax obligations.
• Records related to real estate transactions, including purchase documents, home improvements, and sale agreements, to determine basis and any gain or loss when property is sold.

State Tax Return Requirements

Retention periods for state tax returns and their associated documentation can differ from federal guidelines. While many states align their statutes of limitations with the federal three-year rule, this is not universally true. Some states may have slightly longer or shorter periods, or different rules for specific types of taxes or situations.

It is important to consult the specific tax agency website for your state of residence. If you earned income or conducted business in multiple states, check the requirements for each jurisdiction. Verifying these requirements directly with the relevant state tax authority ensures compliance with all applicable tax laws.

Secure Storage Practices

Proper storage of tax records is as important as understanding how long to keep them. For physical documents, a safe, dry, and secure location is ideal. This could include a locked file cabinet or a fireproof safe to protect against theft, damage from water, or fire. Organizing documents by tax year can simplify retrieval if needed.

Digital storage offers convenience and security if managed properly. Scanning physical documents and saving them as digital files can reduce clutter. These digital files should be stored on secure cloud services, external hard drives, or encrypted USB drives. Regular backups of all digital tax records are important to prevent data loss. Strong password protection and encryption for digital files help safeguard sensitive information from unauthorized access.