After April 15 passes, most of us can’t wait to stop thinking about taxes or being surrounded by tax-related documents. It’s tempting to toss everything out and move on with your life, but that can be a costly mistake.
Keeping the right tax records and knowing how long to keep tax records can protect you if financial questions arise later. Understanding what tax records to keep can also help you file faster next year and stay IRS-compliant so you avoid penalties and audits.
As a professional tax preparer with a large service area, here’s our guide to tax recordkeeping now that tax season is over.
Why You Might Need to Keep Documents
Just because you’ve gotten your taxes filed before the deadline doesn’t mean you’re in the clear. As the IRS reviews your return, the agency may still contact you if it finds errors or discrepancies. After filing, you may even discover that you’ve made a mistake and need to file an amendment. Either way, you’ll be thankful to have your tax records readily available, saving time, money, and stress.
Failure to keep proper documentation of your tax information can lead to serious consequences, including:
- Penalties and interest if you can’t clear up discrepancies
- Denied credits or deductions due to a lack of supporting records
- Issues in proving your income, credits, or deductions during an IRS audit
If you can’t supply evidence in response to IRS requests, the agency could potentially recalculate your tax liability, disallow credits or deductions, or assess additional taxes, penalties, and interest. Beyond just complying with federal laws, keeping past tax records can make your future filings easier. You can often simplify future filing by referring to prior returns, income totals, and deductions.
What Tax Records to Keep
What tax records are essential to keep after filing my taxes?
Here’s a list of key documents to retain even after the current year’s filing deadline has passed:
- W-2s, 1099s, and any other proof of income
- Bank and brokerage statements
- K-1 forms
- Spousal support payment records
- Financial records related to the sale, purchase, or rental of property
- Records detailing stocks, IRAs, retirement accounts, and other investments
In addition to official tax forms, it’s also important to keep supporting records that back up your tax return, including these:
- Mortgage interest statements (Form 1098)
- Health insurance forms (Form 1095)
- Education-related expense documents that show tuition payments and student loan interest
- Receipts for deductible expenses, such as anything medical, charitable, or business-related
When in doubt, hold on to anything that proves income you’ve earned or expenses you’ve claimed. If you are self-employed or routinely claim business deductions, also add these items to your list of financial documents to keep:
- Credit card statements
- Invoices
- Receipts
- Mileage logs
- Cancelled checks
How Long to Keep Records for Taxes
How long do I need to keep records for tax returns? There are certain documents that you should plan to keep for three, six, or seven years, or indefinitely as part of your permanent records for some.
At Western Shamrock, here’s how we advise our customers who trust us with their tax needs.
The Standard 3-Year Rule (IRS Audit Period)
As a general rule, you should keep all tax records for at least three years. The IRS has three years from your tax return filing date to audit it. During these three years, you may also have the opportunity to claim a tax refund if you missed one you are owed.
The 6-Year Rule
However, if you underreport your income by over 25%, the IRS has the right to extend its audit time frame to six years instead of just three. Whether by mistake or intentionally, you’ll need to back up your income claims with documents for up to six years to remain compliant with the IRS.
The 7-Year Rule
Certain circumstances warrant saving tax-related records for seven years. For example, the IRS could legally review your tax information if you claim a deduction for bad debt. Another example is reporting a loss from worthless securities.
Records to Keep Forever
It may sound burdensome to hold onto paper or digital records for the rest of your life, but some documents are worth keeping permanently.
For instance, you should retain copies of all of your filed tax returns, regardless of how old they are. Also, keep copies of all property records indefinitely, or at least several years after you sell a property you own. IRA and retirement account records, especially non-deductible contributions, should be part of your permanent document collection as well. Additionally, any estate and trust documents and records related to an inheritance or gift should be kept forever.
All of these records help establish and track your long-term financial activity and can support future tax calculations when it comes time to file your return again next year.
Special Situations That Require Keeping Tax Records Longer
Although the three-year rule is sufficient for most taxpayers and documents, you may need to hold onto records longer if any of these situations apply to your life:
- Property and real estate
- If you own property, keep records that show the purchase price, home improvements, and depreciation until at least three years after you sell the property to calculate capital gains and losses.
- Investments
- Keep records of purchases and sales of all stocks, bonds, and retirement accounts until at least several years after you’ve disposed of the asset to support tax reporting.
- Amended returns and refund claims
- If you had to file an amended return or claimed a tax refund, keep these records for at least three years from the filing date or two years from paying the tax – whichever of these dates is later.
- Unfiled and fraudulent claims
- If you failed to file a tax return one year or filed a fraudulent return, the IRS has the right to review these records indefinitely, which means you should permanently keep related documentation for your own protection.
What Happens If You Don’t Keep Your Tax Records?
Throwing away your tax documents too quickly creates unnecessary risk. Without supporting documentation, the IRS may default to its own tax calculations, resulting in a higher tax bill for you.
Additionally, if you don’t have the proper records upon request, you could face a reclassification of your income, loss of deductions like business expenses and charitable contributions, and owe more money than you ever expected to have to pay.
FAQ Related to How Long to Keep Tax Records
Here are answers to some questions that our customers often ask about how long to keep tax records. At Western Shamrock, we’re happy to answer all your questions and assist you with our professional tax services at any time of the year.
You can learn more by visiting our general FAQ page, reading our blog, or contacting us directly.
Why should I keep tax records?
Tax records show proof of your income, credits, and deductions. It’s essential to have readily available tax records in case the IRS audits your return or if you need to amend a previously filed return.
Which tax records should I keep?
In general, you should keep all documents that support the information reported on your tax return. Examples include your income forms, bank statements, expense receipts, and investment records.
How long should I keep tax records?
Three years is long enough to keep most standard tax records. However, certain situations require keeping them for longer, such as six years, seven years, or forever. It’s always safer to err on the side of saving more documents rather than throwing more away just to reduce clutter.
Some Additional Tips to Keep in Mind for Managing Tax Records
Now that you understand the answer to “How long do you have to keep records for tax purposes?”, we’d like to provide you with a few practical tips related to tax recordkeeping.
First, it’s not necessary to keep every single financial document you’ve ever had forever. Yet, keeping copies of all filed tax returns you’ve ever had is non-negotiable. Not only are these documents helpful in case the IRS contacts you, but they can also help you file taxes faster in future years and help you if you need to fix a mistake on a previously filed return.
Additionally, remember that lenders and insurance providers may request tax and financial documents to verify your income and confirm eligibility. Lenders like Western Shamrock, which offer personal loans for various purposes, can efficiently process loan applications when all necessary financial details are available in writing.
Whether you decide to store physical paper copies of your tax records at home or off-site or digital versions on your computer is up to you. But ensure that your chosen storage method is always safe, secure, and easily accessible, so you can respond to the IRS quickly without delay.
When it’s time to get rid of old tax documents you’ll never need again, plan to shred them to prevent sensitive data from falling into the wrong hands and to protect yourself from fraud. Simply tossing tax documents into the trash is not sufficient in our modern world and too risky to justify the convenience.
Keeping your tax records organized isn’t just about complying with federal law; it’s also about protecting yourself and your financial future.
How to Organize Your Tax Records
Remember that keeping hold of your tax documents is only helpful if you can find them when you need them. Fortunately, a few simple organization tips can make a big difference and reduce stress when you receive an IRS request or need to access your financial documents for any reason.
- Go digital by scanning paper documents and securely storing them in the cloud or an external hard drive
- Organize all tax-related documents by year in specific folders
- Clearly label all tax documents by category, such as income, investments, and deductions
- Back up all your files, maintaining a backup copy in case of data loss
Digital storage has become both practical and inexpensive in our world today, as long as you approach it with a mindful focus on safety and security. Storing records digitally is especially helpful if you need to retain tax records for more than three years or plan to move residences.
Need Help Staying on Track?
Managing tax deadlines, filing requirements, and document storage can become overwhelming, especially if you have a complex financial situation. Fortunately, Western Shamrock is here to help.
Please contact us or visit one of our local branches to schedule a tax appointment, get guidance on organizing your tax records, or explore other financial solutions. Our on-site teams are available to help you stay prepared for any tax situation that arises and feel confident with your finances year-round.
