If you think your tax work is done once you file your return, think again. Now you need to file your tax records.
Keeping your tax returns and the documents you used to complete them obviously is critical if you’re ever audited. The statute of limitations on IRS audits is a key factor in deciding what to keep and for how long. Good record-keeping also could help if you need to file an amended return because you discovered a mistake or learned of a tax break you should have claimed.
So what tax-related records should you hang on to and for how long? Let’s look at what the IRS recommends based on how long it has to come back at you with questions.
In typical tax-filing situations, the IRS has three years to decide whether to audit — or, as the agency prefers to call it, examine — your return. That means you should keep your records for three years from the date you filed the original return.
This is good practice, too, because you generally have three years from when you filed your return — or two years from the date the tax was paid, whichever is later — to claim a refund or credit from the IRS.
You also should hang on to tax records for three years if you file a claim for a credit or refund after you filed your original return. The limit here could be shifted to two years from the date you paid any due tax, if that date is later than the three-year limit.
The three-year audit period and associated record-keeping guidelines apply in standard filing circumstances. If, however, you don’t include all your earnings on your 1040, the IRS gets a longer window to decide on a potential audit, so you need to keep your tax records longer, too.
Specifically, tax law says that if you under-report your income by more than 25%, the statute of limitations is doubled: The IRS then has six years to decide whether to audit your return. To deal with any questions, you would need to have those six years worth of tax documents on hand.
Sometimes a stock bet doesn’t pay off. In such cases, you can write off the loss from the “worthless security.” If you do, hold those records for seven years. That’s how long the IRS has to come back with questions about your bad investment. The same time frame applies to deductions for a bad debt.
There are some instances in which to keep tax records perhaps forever.
Say someone — not you, of course — commits tax fraud. There is no statute of limitations on tax fraud audits. When the IRS suspects someone entered illegal information on a return, it can investigate at any time, not just within the standard three-year window.
You also need to keep documentation of why you didn’t file a tax return. Yes, that sounds like trying to prove a negative, but if, for example, you took a year off to take care of a sick relative and didn’t earn enough income to require that you file, proof of that will short-circuit a detailed IRS examination of your missing tax year.
What records to keep:
- W-2 form(s)
- 1099 form(s)
- Bank statements
- Brokerage statements
- Alimony received
- K-1 form(s)
- Expenses & deductions
- Alimony paid
- Statements from charities
- Gambling losses
- Closing statements
- Purchase and sales invoices
- Insurance records
- Property tax assessments
- Retirement accounts
- Form 5498 (IRA contributions)
- Form 8606 (nondeductible IRA contributions)
- 401(k) statements
- Distribution records
- Annual statements
- Other investments
- Transaction data (including individual purchase or sale receipts)
- Annual statements
Even after the statute of limitation passes and you get rid of supporting documentation, keep a copy of each year’s tax return that you file. This includes not just the 1040 itself, but also any associated schedules that you sent to the IRS that year. These often are needed when you apply for a loan or other financial assistance, such as money for college.
How to keep your records
OK, you’re probably wondering just where you’ll store all that paper. That’s not a problem.
The law doesn’t require any special record-keeping system for all taxpayers. You can keep your records in any manner that works best for you, as long as it allows you to produce the material if the IRS asks. For most taxpayers nowadays, that means accessing records in digital form.
Converting your tax and other key financial records to an electronic format can save you a lot of space. All the IRS requires is that your electronic record storage meets the same standards that apply to hard copies. That means when you replace the paper versions, you must maintain the electronic storage systems for as long as they might be needed under the tax statutes of limitation.