How Long Should Tax Records Be Retained

We often receive the question from clients “how long do I have to keep my tax records?”

Well, the answer to this seemingly simple question is actually complicated.

Below are some general guidelines to help answer this often wearisome question.

Please keep in mind that your circumstance may require an exception to the guidelines below and each situation should be evaluated independently.

How Long Should a Taxpayer Keep Tax Records?

Clients should keep all supporting documentation for each tax return filed for a minimum of 3 years following the normal filing deadline, or for 3 years after the date you filed your return, if filed after April 15th. However, a better recommendation is to keep all tax records for 7 years, while keeping in mind that some records may be longer. We recommend retaining income tax returns indefinitely.

In our experience, if you can follow these three general rules, you should have all your bases covered in case the IRS comes calling:

  • Keep all income tax returns indefinitely
  • Keep all tax records for 7 years
  • Keep all tax records that may be needed for calculating taxes in future years

Why 3 years After the Due Date (or Filing Date, If Later)?

Generally, the Internal Revenue Service (IRS) has 3 years from either the original due date of the return or the date the return was filed to audit a taxpayer’s tax return and/or assess additional tax.

Is There Any Tax Documentation a Taxpayer Should Keep Longer?

A taxpayer should be careful to keep any records that might be needed for figuring taxes in future years. These records include:

1. Closing Statements for the Purchase of a Home or other Real Estate (HUD-1 Form)

Keep these for a minimum of three years after the property is sold. You’ll want to retain both the purchase escrow and sales escrow statements.You’ll need to show both sides of the transaction and be able to prove your improvements. And, as always, keeping the records for five or seven years past the sale is an even better recommendation.

2. Documentation of the Cost of Improvements Made to Property

Keep proof of those improvements for a minimum of three years after the date of sale of the property in case you need to prove your basis in the property when it was sold. This is true for rental property, investment property, and even your own personal residence. Remember when you added that new backyard deck and patio to your rental property in 1987? Well, you’d better still have that receipt — and keep it with receipts for other improvements to that property for at least three years after you sell it. In cases like this, it is very possible that you’ll have records 10, 20, 25 years old or older. It’s not uncommon if you’re retaining your records appropriately. And again, keeping these records five or seven years beyond the sale date is even better.

3. IRA Records

‍The IRS may require records relating to all IRA contributions and withdrawals until all fund have been withdrawn from the IRA. Specifically, keep copies of Forms 8606, 5498 and 1099-R relating to your IRA accounts.

4. For Inherited Property Received After July 2015

Obtain and keep a copy of Form 8971, information regarding beneficiary acquiring property from a decedent to substantiate property. For property received prior to July 2015, obtain and keep and keep a copy of the decedent’s estate tax return or other documents showing the date of death value of the inherited property.

Sales of real estate, stocks, bonds and inherited property are very likely to have an impact on an individual’s tax liability. Therefore, it is important that records for these items be available for use in preparing the taxpayers’ income tax return in the tax year the property is sold.

In the case of worthless securities, a taxpayer will need to keep those records for a period of 7 years.

Are There Any Tax Documents You Suggest I Keep Forever?

Believe it or not – YES.

We recommend all clients keep a copy of their income tax returns forever.

That’s right! We recommend you never dispose of your copy of the income tax returns. You never know when this document will come in handy. Remember that, in many cases, the IRS destroys the original returns after four or five years. It’s always best to have your copy to fall back on. We also suggest you keep your W-2 forms with your tax return indefinitely. Why? You never know when you might need your W-2 forms to correct a Social Security earnings statement.

Copies of your W-2s can be very valuable in future years… and they don’t take up much space.

Are There Any Other Exceptions to the 3 Year Record Retention Rule?

There is a 6 year rule that applies to a taxpayer that fails to report income that is more than 25% of the gross income shown on the income tax return filed. In this case, the IRS has 6 years to audit the income tax return and/or assess additional income tax. Generally, under-reporting of this magnitude arises when income is unknowingly missing or mistaken at the time the income tax return is filed. In most cases, the omission or error comes to light before the end of the 3 year period.

Under certain circumstances, such as failure to file an income tax return, there is no limit on how long the IRS has to assess additional taxes.

Remember, unlike the “innocent until proven guilty” assumption used by our criminal justice system, with the IRS you must prove the validity of your tax return.

The key is to think before you throw anything out. Don’t just simply throw out some records because somebody gave you an arbitrary time period to hold your records. Take a look at the document and see if it has any impact on any future or prior tax transaction that is not yet out of the statute of limitations period. If you think there may be some future impact, then keep it. If there is no future impact, then you can likely introduce it to your shredder. Think before you shred and you’ll be just fine.