Do you find yourself with the urge to spring clean every year near the federal tax deadline in April? It feels good to throw out some of the financial records stuffing your filing cabinets. But before you head for the trash, make sure you’re not disposing of records you may need, because you don’t want to be caught empty-handed if an IRS auditor contacts you.
The IRS can audit your return for three years in most cases. You can also file an amended return on Form 1040X during this time period if you missed a deduction, overlooked a credit or misreported income. Generally, you must keep records that support items shown on your individual tax return until the statute of limitations runs out, which is typically three years from the due date of the return or the date you filed, whichever is later.
But this doesn’t necessarily mean you’re safe from an audit after three years. There are exceptions. For example:
- If the IRS has reason to believe your income was understated by 25 percent or more, the statute of limitations for an audit increases to six years.
- If there is suspicion of fraud or you don’t file a tax return at all, there is no time limit for the IRS.
How Long to Keep Documents
There is not an easy answer when it comes to how long you should keep documents, just like most issues involving the IRS or other government agencies. The IRS does not require you to keep records in any particular way, but here are some basic guidelines to follow for individuals:
Backup records. Any written evidence that supports figures on your tax return, such as receipts, expense logs, bank notices and sales records, should generally be kept for at least the three-year period.
Completed tax returns. In order to prove to the IRS that you actually filed, many tax advisers recommend that you hold onto copies of your finished tax returns forever. Even if you choose not to keep the returns indefinitely, you should hang onto them for at least six years after they are due or filed, whichever is later.
Exceptions. There are some cases when taxpayers get more than the usual three years to file an amended return. You have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out records that could result in refund claims for those items.
Individual Retirement Accounts (IRAs). The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRA accounts. With the introduction of Roth IRAs, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned. If an account is closed, treat IRA records with the same rules as securities. Don’t dispose of any ownership documentation until the statute of limitations expires.
Issues affecting more than one year. Records that support figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carrybacks or carryforwards or casualty losses, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.
Real estate records. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims, and documents relating to refinancing. These help prove your adjusted basis in the home, which is needed to figure the taxable gain at the time of sale, or to support calculations for rental property or home office deductions. Then, keep these for as long as you own the property, plus three years after you dispose of it and report the transaction on your tax return.
Securities. You must maintain detailed records of purchases and sales to accurately report taxable events involving stocks and bonds, These records should include dates, prices, quantities, dividend reinvestment, and investment expenses, such as broker fees. Keep these records for as long as you own the investments, plus the statute of limitations on the relevant tax returns.
It is best to contact your tax advisors for further information, because these general recordkeeping guidelines are for individual tax purposes, and businesses have different requirements. Insurance companies and creditors may have other requirements as well.