How Many Years Tax Returns to Keep?

Understanding how long to retain tax records is important for managing financial affairs. Proper record keeping ensures necessary documentation is available if tax authorities have questions.

Standard Retention Periods

The most common retention period for tax returns and supporting documents is three years. This period begins from the date you filed your original return or the due date of the return, whichever is later. This timeframe aligns with the general statute of limitations for the Internal Revenue Service (IRS) to assess additional tax.

During this three-year window, the IRS has the authority to audit a tax return and make adjustments. Keeping records for this duration allows taxpayers to substantiate their income, deductions, and credits if their return is selected for review. Maintaining organized records throughout this period streamlines any audit.

Exceptions Requiring Longer Retention

Some situations require longer retention periods. One scenario involves omitting a substantial amount of income from a tax return. If more than 25% of your gross income was unintentionally omitted, the IRS has six years from the filing date to assess additional tax.

When filing a claim for a refund, taxpayers should keep records for three years from the date they filed their original return or two years from the date they paid the tax, whichever is later. For worthless securities or bad debt deductions, records should be retained for seven years.

Employment tax records, like those for household employees, require retention for at least four years after the tax becomes due or is paid, whichever is later. Records for property, including purchase, improvement, and sale, should be kept indefinitely while you own the asset. After disposing of the property, like a sale or exchange, retain these records for an additional three years to support any capital gains or losses reported.

Essential Tax Records to Maintain

Keeping a comprehensive set of documents alongside your filed tax returns is important for accuracy. Income statements, such as Forms W-2 from employers and Forms 1099 for non-employment income, are primary records. These documents verify all reported earnings and are essential for reconciling with your tax return.

Important records supporting deductions and credits include receipts for charitable contributions, medical expense statements, and documentation for business expenses. Mortgage interest statements (Form 1098) are necessary for itemized deductions related to homeownership. Documentation of property purchases and sales is important for calculating the cost basis of assets, impacting capital gains or losses upon disposition. Cancelled checks, bank statements, and other proof of payment substantiate various transactions and are useful during an audit. Previous year’s tax returns and their supporting documentation provide a historical record, aiding in preparing subsequent returns for carryovers or multi-year planning.

Secure Record Storage

Establishing secure methods for storing tax records is important. For physical documents, a secure, dry, and fire-resistant location, such as a locked cabinet or safe, is advisable. Regularly shredding old documents that have passed their required retention periods helps protect personal information from unauthorized access.

Digital storage offers convenience and can include encrypted files on a personal computer or secure cloud storage services. When utilizing cloud services, it is important to choose providers with strong security protocols and to enable features like two-factor authentication. Regularly backing up digital records to an external drive or a separate cloud service ensures data recovery in case of system failure or data loss.