Whether your tax documents are filed away or in a folder on your desktop, you may be wondering, “Just how long do I really need to keep all of this?” As with many tax topics, the answer is: it depends! The length of time you should maintain tax records depends on your personal tax situation and can vary depending on the actions, expenses, or events that are included on your returns.
General Recommendations
For most returns, the IRS statute of limitations for auditing a tax return is three years. This timeline begins from the later of the due date of the return/the date you file or two years from the date you paid tax due. During this period, you can also file an amended return if something was omitted or incorrect on your originally filed return, or to claim a credit or refund due.
As such, the minimum baseline recommendation is to maintain any supporting documentation relating to returns filed within the past three years. This includes W2s, 1099s, medical/charitable receipts (if you itemize), business expense receipts (if self-employed), etc. If you sold a property, maintain records associated with the sale until the statute of limitations for the year in which the property was sold ends. This includes records to figure out any depreciation claimed and to substantiate your cost basis in the property.
As an example, the deadline to file 2020 tax returns was May 17th, 2021. Unless your return was extended, or any of these circumstances below apply to your tax situation, the statute of limitations for 2020 returns ends on May 17th, 2024. This is both the deadline for the IRS to audit and for you to amend your 2020 filing.
Note that there is a difference between supporting tax documentation and the tax return itself. Despite the IRS’s three-year timeline for most returns filed, maintaining copies of your actual returns indefinitely is prudent.
Special Circumstances
There are several situations that require taxpayers to maintain records for longer than 3 years. These include:
- Worthless Security/Bad Debt Deduction: While uncommon, if either of these deductions is claimed, the IRS statute of limitations for audit is 7 years.
- Underreporting of Income: If your originally filed return is found to have underreported income by 25% of gross income, the IRS statute of limitations for audit is 6 years.
- Non-Filed Return: If you do not file a return for a year in which you were required to do so, the statute of limitations clock never starts. As such, these records should be kept indefinitely.
- Fraudulent Filing: Similarly, if a return is filed with fraudulent information, the IRS maintains the right to audit indefinitely.
- If You Have Employees: If you run a business and have employees, keep employment tax records for at least four years after the due date or the tax is paid, whichever is later.
When in doubt, it is best to maintain records a little longer than may be deemed necessary. Rather than maintaining paper documents, consider saving digital copies of all tax returns and related documents in a secure place. This both reduces household clutter and makes the documents more readily accessible in the event they are needed.
Do you have questions about taxes or your financial situation? Please contact us to schedule an appointment with an advisor.
