How Long Should I Keep My Tax Records?

While the IRS will not tell a taxpayer how long they need to keep their tax records, it’s prudent to keep them anyway.  But just what should you keep and for how long? As a general rule of thumb, if you “attempted’ to file your return correctly, then you will want to keep everything for 3 years.  However, take a look at the two tables shown below for further details and items only applicable to certain situations.

Supporting Tax Documentation To Keep

Item Supporting Record
Income Form(s) W-2
Form(s) 1099 (INT, DIV, Etc.)
Bank statements
Form(s) K-1
Expenses Canceled checks or other proof of payment
Invoices
Receipts
Home Closing statements/HUD-1
Purchase and sales invoices
Proof of payment
Insurance records
Investments Brokerage statements
Mutual fund statements
Form(s) 1099
Form(s) 2439

 

Length Of Time One Should Keep Their Tax Documentation

Situation Retention Period
Owed tax and the subsequent three situations do not apply to you 3 years
Did not report income that is more than 25% of the gross income shown on the return you filed 6 years
Filed a fraudulent return Indefinite
Do not file a return Indefinite
File a claim for credit/refund after you filed your return 3 years or 2 years after tax was paid (whichever is later)
File a claim for a loss from worthless securities 7 years

 

How were the lengths of time determined?  Most of them coincide the the various IRS Statute of Limitations.  This is the length of time the IRS has to assess additional tax against a taxpayer, request further information or subject a return to audit.  Needless to say, one wants to make sure they have their “proof” for at least the length of the statute.  However, it may be advisable to keep your support indefinite.

For example, if you make contributions to your IRA, you will want to probably keep all of your tax returns.  Why?  Well, when it comes time for you to make your withdrawals come retirement, those that represent a return of the money you contributed are tax free.  How will you know how much you contributed?  Exactly; you’ll need the originally filed tax returns!  So keep those tax records as long as you think you may need to; you never know when you may have to reference them to prove your case.

Understanding IRS Statute Of Limitations

When dealing with an old tax return, sometimes people wonder just how long the IRS has to come after them for the tax.  Sometimes people want to know how long they have to claim their refund.  Other times people want to know what happens if there was a mistake.  The short answer? It all depends.

Filed Tax Returns:

Deadline for Assessment
Generally, the statute of limitations for the IRS to assess taxes on a taxpayer expires three (3) years from the due date of the return or the date on which it was filed, whichever is later.

However, the IRS has six (6) years to assess additional taxes if:

  • You omitted income that adds up to more than 25% of the income you reported on your return OR
  • You fail to included foreign financial assets that breached the reporting thresholds

Deadline For Collections
The IRS statute of limitations period for the collection of taxes, known as the Collection Statute Expiration Date (CSED), is generally ten (10) years. Thus, once an assessment occurs, the IRS has 10 years to collect.  If they can’t collect within the time frame then the taxes simply just vanish as a result of being discharged.

Unfiled, False or Fraudulent Returns:

Deadline to Claim Your Refund
The deadline for you to claim a refund on a tax return in which one was owed to you is 3 years from its due date (excluding extensions).  For example, if you were due a refund on your 2011 Income Tax Return (which was due April 15th 2012), you have until April 15th 2015 to claim it.  If you don’t file a claim for a refund within three years, the money becomes property of the U.S. Treasury.

Note, there are no interest and penalties for failing to file a return in which a refund was owed.  However, if you have a balance due, those items can be pretty stiff as outlined in this post.

No Statute Situations
The IRS has an “unlimited” amount of time to assess taxes against a taxpayer if they can establish that they:

  1. Simply failed to file a return;
  2. Filed a false or fraudulent return; or
  3. Willfully attempted to evade tax