Should You Shred Your Old Tax Returns?
The decision to shred tax returns is more complex than a single rule. Understand the varying retention periods for different documents and situations.
Deciding to shred old tax returns requires caution, as acting too quickly can lead to complications. Federal and state agencies have specific timelines, known as periods of limitation, during which they can audit your returns and assess additional tax. Disposing of records before these periods expire can leave you unable to substantiate the figures on your return. Understanding these retention rules is an important part of managing your financial records.
The General Record Retention Guideline
The most common timeframe for retaining tax records is three years. This period of limitations begins on the date you file your return or the tax deadline for that year, whichever is later. For example, if you filed your 2023 tax return on March 15, 2024, the retention period extends to April 15, 2027, as the tax deadline of April 15, 2024, is the later date. This guideline applies to the tax return itself, such as Form 1040, and all supporting documentation.
Supporting documents provide the proof for the numbers you report, including Forms W-2, 1099s, and records for any deductions or credits claimed. For instance, if you claimed charitable contributions, you must keep receipts or bank statements for the three-year period. After this window closes, the IRS cannot initiate an audit for that tax year, making it safe to dispose of these records.
Exceptions Requiring Longer Retention
Several situations extend the record retention period beyond three years. A six-year rule applies if you substantially underreport your income by omitting more than 25% of the gross income reported on your return. This six-year period also applies if you fail to report more than $5,000 of income from foreign financial assets, giving the IRS more time to assess additional tax and penalties.
If you claim a deduction for a loss from worthless securities or a bad debt, the retention period extends to seven years. This longer timeframe allows for the complexities involved in proving such a loss. For small business owners, employment tax records must be kept for at least four years after the date the tax becomes due or is paid, whichever is later.
The look-back period can be extended indefinitely. If you file a fraudulent return, there is no statute of limitations, allowing the IRS to audit and assess tax at any time. Similarly, if you fail to file a tax return, the period of limitations never begins, and the related financial records should be kept permanently.
Documents Supporting Property and Assets
Record-keeping for property and assets is tied to the life of the asset. Documents related to the purchase and improvement of property, such as a home, rental property, or investments like stocks, establish its “basis.” Basis is the amount your property is worth for tax purposes and is used to calculate gain or loss when you sell it. These records must be kept for as long as you own the property.
After you sell the asset, you must keep these basis-related documents for the standard period of limitations, usually three years, after the year you report the sale. For example, if you bought a house in 2010, improved it in 2015, and sold it in 2024, you must keep the purchase and improvement records until at least 2028. These documents include closing statements, receipts for improvements, and records of stock dividend reinvestments.
State Tax and Non-Tax Considerations
Your record retention strategy must also account for state tax rules. State tax authorities have their own statutes of limitations, which can be longer than the federal three-year period. You should check with your state’s department of revenue to understand its specific requirements for auditing returns.
Beyond tax obligations, old tax returns and their supporting documents are often needed for other financial matters. Keeping these records is helpful for:
- Verifying income for mortgage or loan applications.
- Applying for federal student aid using the FAFSA.
- Confirming earnings history for Social Security benefit calculations.
- Proving income in legal proceedings.
Securely Disposing of Tax Records
Once a record’s retention period has passed, you must dispose of it securely. Tax documents contain sensitive personal information, including your Social Security number, address, and financial data. Simply throwing these papers into the trash or recycling bin creates a significant risk of identity theft, as the information can be used to open fraudulent credit accounts or file false tax returns.
To mitigate this risk, all documents should be thoroughly destroyed. Using a personal cross-cut or micro-cut shredder is an effective method, as these devices cut paper into tiny, unreadable pieces, making reconstruction nearly impossible. For larger volumes of paper, professional shredding services offer a secure and convenient alternative.