Keeping your tax records is important if you hope to protect yourself in the event of an audit or need to provide proof of your earnings to the Internal Revenue Service (IRS). The amount of time you should be holding onto these taxes depends on the type of expense and what the document is recording. Each record has a period of limitations that allows the IRS to assess additional liability or gives you the opportunity to amend your taxes to claim additional refunds or credits. In most cases, you should be holding onto your docs until the period of limitations for your specific situation has passed.
The limitations period begins on the tax due date. If you file before they are due, your records will be treated as though they were filed on the deadline, which is April 15 of each year for most traditional families but can vary if you pay quarterly. Keeping copies of your filed forms can make it easier to amend the finished forms and prepare future documents.
Benefits of keeping your tax documents
Many people either assume that they do not need to keep copies of their documents at all since they were filed with the IRS or that they need to hang onto their taxes for seven to 10 years or more. However, the primary reason to store your filed IRS forms is to protect you if you get audited. Since your records provide a thorough history of your finances, and the U.S. tax system is so complex, you will want to be sure that you are remaining in compliance with state and federal financial contribution laws.
It may be in your best interest to thoroughly organize your docs and keep them stored safely for the recommended amount of time based on the specific type of tax papers. Some of the top benefits of keeping copies of your papers include:
- Being able to verify that you are entitled to the credits and deductions you claimed on your taxes
- Having verifiable proof that you filed your required paperwork and complied with your financial obligations
- Being able to show a record of your earnings through 1099s and W-2s
- Being able to secure lines of credit or loans
- Protecting yourself if you become the object of an IRS audit
- Availability for estate planning and inheritance purposes
- Proof of eligibility for a credit or refund
These are only a few of the advantages of keeping your records readily available for several years after the filing date. Since there are no disadvantages, there is no reason not to save them to protect yourself from future potential liability issues.
How long to keep income tax returns and tax documents
The amount of time you should keep specific taxes varies depending on the type of forms in question. Here are some of the recommended time frames for storage:
Records should be kept indefinitely if you file a fraudulent return
Records should be kept for three years from the date of your original return
Keep records for at least two years from the date you paid your return
Maintain records indefinitely if you have not filed a return
Keep employment returns for a minimum of four years after the pay or due date
When you are considering whether to toss or keep specific taxes, it is important to consider the type of form. However, it relates to your returns and whether you might need it in the future if you are audited.
Three years is the general recommendation
The general rule for keeping copies of your docs is to store them for at least three years. Having a paper trail is the best way to protect yourself if the IRS scrutinizes your financial history. Remember, the IRS typically has up to three years from the date of your filing to audit your return.
Unfortunately, many situations allow the IRS to make inquiries after three years have passed. For this reason, it may be well advised to consult with a professional about your specific situation.
You should keep these types of taxes
It may seem tedious, but it may be worth your time to store any and all documents that relate to your specific returns. If the state or federal government finds it necessary to take a deep dive into your financial situation, these documents can substantiate your claims. Some of the most important records you should keep include:
- 1099s
- Business documents
- Deposit slips
- Supporting documentation of itemized deductions
- Invoices
- Mileage logs
- Paid bills
- Payroll documents
- Receipts for medical expenses
- Receipts for property records
- W-2s
There are also many other records you should maintain to stay organized. Essentially, anything that can be used as proof of what you claim could be valuable and is therefore worth hanging onto.
Federal tax forms
You should always keep copies of your finished federal taxes. It is not unusual for financial advisers or accountants to recommend federal returns be held indefinitely. At a minimum, you should be keeping copies of your federal returns for at least six years after the deadline.
However, you do not need to keep your supporting documents for that long. You should hang onto these documents until the three-year statute of limitations period has ended. Examples of these documents could include records of:
- Retirement plan contributions
- Alimony payments
- Mortgage interest payments
- Canceled checks
- Charitable contributions
- Student loan interest payments
Hanging onto these records makes it easier to amend your finished returns if you misreported your income, failed to include a deduction, or are eligible for credits.
Investment account statements
When filing your refund, you will need to report all investment account events, including stocks, bonds, and other investments. Some of the most important records to keep involving investment accounts include:
Records connect to investment expenses
- Prices
- Dividends paid
- Pay dates
- Brokers fees
- Brokerage statements
- Reinvestments
- Other documents for tax purposes
- Documentation of received property
According to the IRS, you must keep copies of your 1099-R, Form 5498, and Form 8606 until all money has been withdrawn from these accounts. However, you should never get rid of any ownership documents until the statute of limitations period has passed.
Employment tax records
Business owners and independent contractors must be on top of their employment records. If you hire employees on a W-2, they will be on payroll. You should keep all payroll documents and related paperwork for a minimum of four years from the due date. If you hire independent contractors, maintain copies of their W-9s for the same amount of time.
If you are an independent contractor, keep copies of your W-9 documents and 1099s for at least three years. However, if you are experiencing a fraud issue or have not gotten your returns filed for a specific year, keep these detailed records indefinitely until you get caught up or resolve the situation.
When you report income, you should also maintain copies of these documents if you make a mistake making your quarterly tax payments. If these payments do not accurately reflect the total amount of income you made for that year, the IRS can elect to seek these unpaid liabilities for up to six years from the deadline of the filing. However, this generally only applies if your gross income was underreported by 25% or more.
Retirement accounts
Maintaining copies of your retirement funds and other related documents should be a top priority. If you make contributions to retirement savings accounts, for example, these can be deducted when you file your returns.
You should generally plan to keep these records for at least three years. However, you may need to keep them longer when you start taking money out of your retirement account. Generally, it is recommended that you keep copies of these returns for a minimum of seven years after your retirement funds are emptied.
Property tax and real estate records
Property does not refer to real estate or commercial office space alone. It can also include any business assets, equipment, or stock. You should plan to hang onto all financial records related to your situation until the limitations period passes after selling or disposing of the property and reporting the transaction through your filings.
While you own the property, if you need to file an insurance claim or make improvements, be sure to maintain copies of any receipts and related documents. You should also keep copies of documents related to refinancing, home equity loans, home equity lines of credit (HELOC), and other relevant forms. Do not dispose of the property records of your real estate purchase until you dispose of the property.
These records can help you determine your capital gains tax or losses upon sale of the property, and amortization, depletion, or depreciation deductions. They can also be used to calculate the value of your home office or rental property deductions.
Bills and receipts
Many credit card statements, utility expenses, phone bills, and other monthly costs are available virtually either online or through various apps. If you are still receiving paper bills, it is generally acceptable to get rid of them as long as you have virtual copies of these documents. However, you may want to keep copies of your receipts for big-ticket purchases, such as:
- Company vehicles
- Real estate
- Furniture
- Jewelry or other valuables
These receipts and bills should be kept as long as you are in possession of these items. If you need to file a claim for damages through your insurance company or are hoping to use these items as deductions, these records will help you remain organized and in compliance with state and federal rules.
Expenses under $75
You may be hoping to deduct meals, transportation, and other expenses valued at under $75. It is not uncommon for people to believe they need to keep receipts for all expenses. However, the IRS is much more lenient regarding receipts for expenses under $75 when they are claimed as deductions.
Instead, take the time to create a spreadsheet that carefully details these costs. Your spreadsheet should include the date of the expense, the reason for the expense, and how much you spent. Including as much information as possible about these costs can only help you.
For example, if you want to deduct business meal expenses, make a note of what you and your colleagues talked about. This way, your Friday night work meeting is legitimately documented. This information will be useful when you prepare your return documents.
How long to keep tax returns for the state
It might surprise you to learn that you should keep tax records of your state filings longer than your finished federal returns. Each state sets its own deadlines for income tax returns. For example, Montana allows taxpayers up to five years to audit returns under MCA 15-35-114, whereas California has four years until the statute of limitations expires, according to the California Franchise Tax Board.
This only applies to income returns. If there are filing issues, such as suspicion of fraud, the statute of limitations expires much later. For instance, in California, the statute of limitations for collecting unpaid state or bad debts is 20 years from the assessment date, according to California Revenue and Taxation Code § 19255. If you have concerns about complying with state laws, you may be able to ease your fears by working with a dedicated attorney.
If you find yourself being audited, keep copies of the documents from that year for at least one year. This is because states will have up to one year from the date of the audit completion to resolve any discrepancies in your financial reporting.
Other records to consider keeping
There are many other types of documents you should plan to store for several years, particularly if you are a business owner. Not only can you protect yourself in the event of an audit, but these documents may be necessary if you hope to open up financial accounts, secure loans, get investors, or obtain insurance coverage. Many business documents should be held onto indefinitely. These include:
- Annual reports
- Business formation documents
- Contracts
- Financial statements
- Licenses
- OSHA documents
- Permits
- Regulatory documents
- The deed of incorporation
When you are responsible for business taxes, it may be well-advised to keep digital copies of all documents. You never know when you may need them. If you are ever unsure whether certain documents should be shredded, err on the side of caution and keep them.
Exceptions to the tax records rule
There are several exceptions to the statute of limitations for IRS audits. Just because three years have passed does not mean the IRS will not audit you. If you do not file your returns at all, there is no time limit for legal action. There is no statute of limitations on fraud either.
If the IRS believes you understated your gross income by 25% or higher, the statute of limitations for an audit is six years, according to the IRS publication under IRS Code 25.6.1. But these exceptions do not only apply to IRS audits alone.
For instance, if you learn that you can claim deductions for worthless securities or outstanding debts, you may have up to seven years to amend your returns and claim the bad debt deduction, according to the IRS. Form 8582 IRS instructions also state that carryovers should be saved until the deductions are no longer active, plus at least seven to 10 years. This might include federal disaster casualty losses or charitable deduction carryovers.
How to know when it's the right time to purge your income tax records
Tax papers can pile up in your Google Drive or on your computer. They can also take up space in your office or home. When you are spring cleaning, moving, or simply trying to keep your space organized, you may be anxious to get rid of unnecessary income and financial papers.
Getting rid of these documents too soon could make it difficult or impossible for you to defend state tax agency and IRS inquiries or amend a return. For this reason, you should always speak with your tax expert before shredding amended returns you are unsure of.
In certain situations, you may need to hang onto copies of these records. For example, many insurance companies and creditors require returns from many years ago to open accounts. You do not want to risk not being able to meet your financial goals because you purged your returns too quickly.
How to dispose of your old tax documents
After the statute of limitations for your situation has passed, you may be ready to get rid of your old and unnecessary forms. If you are storing your documents digitally, you should be able to store them indefinitely.
You do not need to go into your Google Drive or iCloud and delete them just because the statute of limitations has passed.
Never throw your returns away in the trash. If you were holding onto paper copies, the best way to get rid of them is by using a shredder. Your returns contain sensitive financial information. If this gets into the hands of the wrong people, you could find yourself a victim of identity theft.
Ways to store old documents
There are several ways you can protect your finished returns. One of the best ways to store paper copies of your returns is by putting them in a fireproof safe where you store your family's important documents, such as:
- Bank account passwords
- Brokerage account passwords
- Death certificates
- Insurance information
- Marriage certificates
- Mortgage documents
- Social Security cards
- The deed to your home or land
- Trust documents
- Will and estate planning documents
If you decide to store your important documents in a fireproof safe, make a copy of the key as well. You can either hide the key in a safe location and inform a trusted family member or trust a family member with a copy of your key. If an emergency strikes, this designated individual will be able to access these documents and manage your affairs if you are unable to do so.
Digital storage
You do not need to keep paper copies of your returns. There are several ways you can store these forms without cluttering your home. If you filed your refunds digitally, you should be able to access them through your tax prep service, such as TurboTax or Free Tax USA. If you filed with a preparer like H&R Block or an accountant, you should have a digital copy sent through your email and stored in your Google Drive or iCloud.
The ink on paper documents could become discolored, fade, or be unreadable if damaged when stored over several years. For this reason, you might want to scan your returns and keep a backup of them on a password-encrypted hard drive.
Electronic storage is often one of the best ways to stay organized, as you can create folders for each season which makes it easier for you to access the documents you are looking for. Once your documents are stored digitally, you can safely shred paper copies of old tax filings, receipts, and other financial records. As long as your digital records are legible, the IRS should accept them in the event of an audit.
Old tax return takeaways
While you might have thought you needed to hold onto your financial records for a minimum of seven years, three years is the new standard. This is because the statute of limitations on returns through the IRS requires filing at three years after your original return filing or two years after you paid your returns.
The IRS also generally only has three years from the due date of your return to assess additional tax. Hang onto your returns and documents for a minimum of three years before purging or longer, depending on the specific circ*mstances of your situation. If you need to amend your prior filings or challenge imposed penalties, you will be glad you did.
