When filing away tax documents, it is important to understand what you need to keep and why. One of the many reasons for keeping this documentation is the statute of limitations, which limits the amount of time the IRS has to potentially audit your return. Additionally, you may have other reasons for saving tax documentation, such as for mortgage loan applications, student loan applications, and other reasons.
How long should you keep copies of filed tax returns?
In most situations, the IRS has three years from the date the return is filed, or the due date of the return, whichever is later, to audit your return. Under certain situations, the statute of limitations doubles to six years or more. For example, if the IRS believes that you have omitted more than 25% of gross income on your tax return, the statute of limitations increases to six years. If you have written off the loss from a worthless security, the IRS has seven years to audit your return.
If the IRS suspects that you have filed a fraudulent return, there is no statute of limitations and therefore no time limit imposed on the IRS. If you do not file a return at all, the statute of limitations has no starting date, meaning there is no time limit for the IRS. Therefore, most tax advisers recommend saving tax returns indefinitely, in order to prove that you filed. If you are not required to file a return, you should keep documentation for why you were not required to file.
What other documents should you maintain?
Generally, you should keep records that support any item of income, deduction, or credit that was shown on your tax return until the statute of limitations runs out for that specific return.
Some examples of documentation to maintain include:
- Income – W-2s, 1099s, bank statements, brokerage statements, K-1s.
- Deductions– Invoices, receipts, canceled checks or other proof of payment.
- Home – Closing statements, insurance records.
- Retirement – Form 5498, Form 8606, Form 1099-R, annual statements.
- Health Insurance – Form 1095 (A, B, & C), Form 8965, support for HSA contributions and distributions.
- Itemized Schedule A Deductions – Medical receipts, property tax receipts, receipts for donations to charity.
- Schedule C (Business) & E (Rental) Items – Proof of receipts and expenses, including for auto expenses, mileage logs, and repairs.
There are also certain records that you should retain longer, or permanently. Documents relating to IRAs and retirement information should be kept indefinitely. Records relating to real estate, such as closing documents, support for capital expenditures and improvements, refinancing agreements, and insurance claims should be maintained for at least three years beyond the year that you sell the property (see statute of limitations discussion above). You should also maintain records of security purchases and sales for at least three years after you sell the security (or longer depending on the statute of limitations that applies to your situation). These records are important for establishing basis in your property or securities.
It is also helpful to retain copies of old tax returns and records to help with the preparation of your return in following years. If you are considering hiring a CPA or changing CPA firms, you can expect your new CPA to request returns from at least the prior year. Your new CPA can review prior year returns for errors and file amended returns if necessary.
It is important to note that the guidelines above pertain to federal income tax returns only. States have their own statutes of limitation and rules about recordkeeping. If you have further questions regarding records you should keep, and for how long, contact your tax adviser or attorney. And remember: when in doubt, DON’T throw it out!
By Dylan Wright