A frequently asked question we get from clients is, “How long do I need to hold onto my tax returns and supporting documents?”
The answer is very similar to most in the accounting world – “It depends.”
You should keep your tax returns and other documents that support an item of income, deduction or credit shown on your tax returns until the period of limitations for those tax returns runs out. The period of limitations is a period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.
Generally, the IRS has at least three years to question items on returns and bill for any additional tax.
Other than copies of your tax returns, you should also make sure that you have records that list: income (wages, interest/dividends); exemptions (cost of support); medical expenses; tax; interest; charitable contributions; mutual funds; stocks; childcare; business expenses; professional and union dues; uniforms and job supplies; education (if deductible for income taxes); automobile (business/charity); and travel expenses.
If you have any hesitation about the validity of your tax returns, it may be best to hold on to your returns and records for up to six years. The IRS can go back that far if a return omits more than 25 percent of income.
If you file a claim for a loss from worthless securities or bad debt deduction, you will want to keep records for seven years.
You will want to keep your records indefinitely in one of two cases: if you fail to file your returns; or if you file a fraudulent return. If fraud is proven, there is no limit as to how far the IRS can go back.
Once the period of limitations runs out, before you throw away your tax returns and records, you should review your documents to see if you might need them in the future.
One important question you will want to ask yourself is, “Are the records connected to property?” Hold on to any records that help to establish the adjusted basis of real estate. For old and new property, keep records that relate to property until the period of limitations expires for the year in which you dispose of the property. This also pertains to property that you either inherited or received as a gift.
If you have to file a business return, you will need to keep employment tax records, such as payroll tax returns, wage amounts, copies of all W-4 forms, and amounts and dates of tax deposits for a minimum of four years after the date the tax becomes due or is paid, whichever is later.
It is also important that you retain copies of worker health coverage forms for at least three years after the deadline for filing these documents. Records on cost of assets, depreciation, etc. should be retained for decades.
Although there is a trend of three- to four-year retention rates, know that these are only the IRS standards. Retention rates can also vary by state. Insurance companies or creditors may require you to keep records longer than the IRS does, so make sure you read your documents and check with the appropriate authorities before shredding important records.