Tax Record Retention: What to Keep and How Long to Keep It

Eva from Indianapolis asks “My personal files are piling up and I’d like to purge what I can. How long do I need to keep copies of my tax returns and other tax documents and which ones do I need to keep?”

Well Ava, I know that these types of files and documents can really start to add up but you want to make sure you have the documentation you need to support the amounts reported on your tax returns in case the IRS selects you for an examination.

There are other reasons to keep records besides an IRS examination. You’ll also want to keep good records for both insurance purposes or if you’re qualifying for a loan. Keeping adequate records can also help you identify sources of income or keep track of your basis in property which becomes important when you sell it.

You can keep your records electronically or on paper; the IRS doesn’t require you to keep your records in any particular way, just in a manner that will allow you and the IRS to determine your correct tax.

An electronic storage system is a great way to store your information but be certain to test the indexing, retrieval and reproduction capabilities before destroying the original documents. If your electronic system is not capable of reproducing your records in compliance with IRS requirements, you could be subject to IRS penalties in the case of an examination. You should also know that the IRS may test your electronic storage system, including the equipment and software used for compliance purposes if you’re involved in an examination.

The length of time you need to keep your documents depends upon what it supports. For tax documents, you need to be aware of the statute of limitations for different scenarios with your tax return. This refers to the period of time in which you can amend your tax return to claim a credit or refund or the IRS can assess additional tax.

For example, if you filed a tax return and you owed additional tax then the statute of limitations is 3 years from the date the tax return is due or when it is actually filed, whichever is later. But, in order to qualify for the 3 year statute of limitation, you had to report your income and deductions correctly because, if you understate your income by 25% or more, the statute of limitations jump to 6 years and, if you filed a fraudulent tax return, there is no statute of limitation.

You’ll want to keep, what the IRS calls, basic records because these prove your income and expenses. If you own a home or have investments, your basic records should also include documents that pertain to these items.

Basic records for your income should include:

• W-2’s
• 1099’s
• bank statements
• brokerage statements
• mutual fund statements
• K-1’s from business activity
• form 2439, which is a notice to a shareholder of undistributed long term capital gains

Basic records for expenses include:

• sales slips
• invoices
• receipts
• canceled checks
• written communication from qualified charities

The documentation you need to keep for your home ownership would include:

• closing paperwork
• purchase and sales invoices
• proof of payment
• insurance records
• receipts for improvement costs

A comprehensive list of what you should keep and for how long can be found when you visit my website at www.actservices-inc.com on the Biz TV page. There you’ll find information on this and other tax topics. Thank you for your question, Eva! I hope that helps!