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Know How Long to Keep Your Tax Records?
Stephanie B. Ritchie, CPA
Senior Manager, Accounting and Assurance Services
March 9, 2009
You may feel like celebrating after you file your tax return, but resist the temptation to make confetti from the supporting documents. It's essential that you save all of the paperwork that can protect you during an IRS audit or help you file an amended return for a refund.
So, which documents should you keep, and for how long?
The guidelines below describe, in general terms, the records you should keep for federal tax purposes. Each state may also have its own record retention requirements.
Completed Tax Returns
It's generally wise to keep copies of your prior years' tax returns forever so that, if an issue ever arises, you can prove to the IRS that you actually did file them. There is no statue of limitations for failing to file a return.
If you've lost or misplaced your copy of a previously filed return, you can request a free tax return transcript from the IRS by calling 1.800.829.1040. The transcript shows most line items from your tax return as it was originally filed, including accompanying forms and schedules. If you need a complete copy of the tax return, including attachments, you'll need to file Form 4506 with the IRS. There is a charge for this service.
Substantiating Paperwork
You should retain all of the paperwork that backs up the items on your tax return for three years after the return is filed. That paperwork includes receipts (including those for flexible spending accounts), cancelled checks, W-2s and other supporting records.
Once again, the reason you must keep these items has to do with the statute of limitations. In most cases the IRS can audit your tax return for three years. You can also file an amended return during this time period if you missed a deduction, overlooked a credit, or misreported your income.
There are, however, certain exceptions to the three-year rule.
 The IRS has up to six years to conduct an audit if you understate your income by more than 25 percent of the gross income shown on the return.
You have up to seven years to amend your return in order to take deductions for worthless securities. Don't shred any records that would support such deductions.
If the IRS alleges your return is fraudulent, there is no statute of limitations. They can come after you at any time.
Investment Statements
Save information about stocks, bonds and other investments for as long as you own them. To calculate capital gains or losses, you need data from these statements that show the purchase date, price, commission and dividend reinvestment.
If you invest in limited partnerships or passive activities, you should retain all related records for three years after you sell your investment.
Employment Tax Records
Keep all employment tax records for at least four years after the tax becomes due or is paid, if later.
Individual Retirement Accounts
The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With the introduction of Roth IRAs, it's more important than ever to retain all IRA records pertaining to contributions and withdrawals in case you're ever questioned.
Real Estate
Save records that enable you to compute the basis or adjusted basis of your home or other real estate. You'll need this information to determine depreciation for home office or rental purposes, as well as any taxable gain if you sell.
Also keep records related to your purchase price, mortgage and mortgage refinancing, settlement or closing costs, the cost of improvements, casualty loss deductions, and insurance reimbursements for casualty losses.
Generally, you should retain this information for as long as you own the property and, after you dispose of it, for the statute of limitations period that applies. If you receive other property in a nontaxable exchange, you should keep your records for the old and new properties until the statute of limitations expires for a taxable disposition of the new property.
Multiple-year Write-offs
Save all documentation to support any deductions that you take over more than one year. If you carry over excess write-offs because they can't be deducted right away, you'll need to save the related records even longer.
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