HOW LONG SHOULD I KEEP MY RECORDS?
How long to keep tax records is a common question, but the answer is more complex than it appears. When considering record retention, you must evaluate IRS statutes of limitations as well as the risk of losing documents needed to support insurance claims, creditor disputes, Social Security benefits, or IRS inquiries.
Generally, you should keep tax records for at least three (3) years after the due date of the return or two (2) years after paying the tax, whichever is later. However, several important exceptions may apply.
Extended IRS Assessment Periods
Determining how long to keep tax records depends on the action, expense, or event that the documents record.
- If you omit income equal to more than 25% of the gross income reported, the IRS may assess additional tax for six (6) years.
- If you do not file a return, file a fraudulent return, or deliberately attempt to evade tax, there is no time limit for IRS assessment. In these cases, keep records permanently.
- If you claim a loss for worthless securities or take a bad debt deduction, the IRS has seven (7) years to assess additional tax.
- If you file an unsigned return, the IRS may assess tax at any time. Retain those records permanently.
State tax agencies may adjust returns based on federal changes. As a result, state statutes of limitations are typically one year longer than federal limits.
Records You Should Keep Longer
Certain records require retention well beyond the standard three-year guideline.
Investment and Property Records
Keep all records related to property, including stocks, mutual funds, and capital assets, longer than three (3) years.
- To document gain or loss on a stock sale, retain purchase records for at least four (4) years after the year of sale.
- If you reinvest dividends, keep stock and mutual fund statements for at least four (4) years after the final sale of the investment to prove the basis.
- To establish total cost of tangible property purchases, retain purchase and improvement records for investment property, rental property, and business acquisitions for at least four (4) years after the sale.
Although rules for the sale of a personal residence have changed, retain those records in case your gain exceeds the exclusion, you convert the residence to rental property, or you use it for business purposes.
Employment Tax Records
Businesses with employees should retain employment tax records for at least four (4) years after the tax becomes due or is paid, whichever is later.
How Long to Keep Tax Records to Be Safe
At a minimum, keep all tax records and supporting documentation for at least seven (7) years. This covers most federal period of limitations.
Although you may discard backup documentation after the applicable statute expires, keep copies of your tax returns and Forms W-2 permanently. You may need them to verify Social Security benefits, document income history, or support future property transactions.