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How Long You Are Required to Keep IRS Records

How Long You Are Required to Keep IRS Records

Every time you file your taxes, a trail of paperwork is involved. Once you've settled with the IRS, you might be tempted to throw away all those documents. But the IRS recommends keeping your tax returns and related documents for at least 3 years. In some situations, you may need to keep them longer.

Here are the guidelines for deciding how long you should hold the record.

Keep records for at least three years.

The rule of thumb is to keep tax returns for at least 3 years from the date of filing, due date, or tax payment date, whichever comes last.

Within three years, you can make changes to your tax return to claim a refund or credit. Also, the IRS statute of limitations allows you to dispute or verify a return during this period. If the Internal Revenue Service has questions about your tax return or wants to perform an audit, you will likely be asked to send in your tax documents.

In addition to the tax return, you must keep all supporting documents. Items to keep include W2 forms, 1099 forms, unemployment records, credit card receipts, utility bills, mileage records, statements detailing bond transactions you have made, and documents detailing your contributions to retirement savings accounts.

Tax records may be kept longer in certain situations. Generally, a more complicated tax situation will result in a longer holding period.

Keep tax records for 6 years if you omitted some income

You are required by the IRS (Internal Revenue Service) to keep your tax records for 6 years if you underreported your income, which accounts for more than 25% of your gross income.

If you have a cut-and-dry tax return with direct W2 income, this additional time requirement does not apply to you. But if you have a complicated return that intentionally underreports income, the IRS has six years to check the records and assess more taxes.

Quick Tip: The IRS receives information about your income from various sources and uses an automated system to detect potential discrepancies. A tax auditor will examine the document in more detail if there is a possible discrepancy. Depending on what they find, the IRS may charge additional fees.

Retain tax returns and records for seven years for capital losses

Keep your records for seven (7) years if you report a capital loss or bad debt on your return. The extended records retention period gives the IRS enough time to review your claim and confirm that the correct amount of tax was paid.

In addition to your tax return, be sure to keep detailed records of the capital loss itself.

Keep records for ten years or more under certain circumstances

Tax filers who paid taxes to a foreign government can claim an itemized credit or deduction for those taxes for up to 10 years. The detailed credits and deductions are only available if the same income is subject to US tax. But keeping these tax records for ten years will help you substantiate your claim if necessary.

If you are an owner, additional time requirements must be considered. First, you will want to maintain tax records relating to a particular property during your tenure. These records will help you determine amortization, depreciation, depletion allowances, and capital gains related to the property. Once you have sold the property, you must keep the records until the statute of limitations expires.

But there is a problem when it comes to non-taxable assets. If you buy property on a tax-free exchange, you will need to keep tax records for the old and new property until the statute of limitations expires when you sell the new property.

A quick tip: Section 1031 of the tax code allows you to trade goods of the same kind without recognizing a capital gain or loss. Investors and companies can take advantage of this opportunity to pursue their investment goals without incurring a heavy tax burden.

Beyond the 10-year limit, the IRS recommends keeping your tax records only if you file a fraudulent or no return. The IRS strongly recommends keeping these records if you knowingly violated the tax code. But, of course, ignoring your tax return or committing tax evasion on purpose is not advisable.

Bottom Line

The IRS clearly outlines guidelines for how long you must keep tax records. But some experts recommend holding returns longer than the IRS recommends.

If you can, and it is easy and affordable to scan and upload to the cloud, please do so, as there's very little downside to keeping old statements. However, there are a lot of potential nightmares if you need an old statement and can't access it.

Finally, you will be safe by following the retention rules established by the IRS. But if you want to keep those logs for longer, it doesn't hurt to have them on hand if you need them.