Afraid of an audit? How long you should keep tax records

What tax records to keep and how longFor weeks now, I've been posting about the importance of keeping good records to substantiate your tax returns. The question that usually follows is, "What do I keep and for how long?" The difficulty is that there is no one-size-fits-all answer to that question. It depends on your individual circumstances. Following are some general tips for keeping your tax records:

1. Keep tax records that support your tax return until the statute of limitations runs out. The statute of limitations for most individual tax returns is three years after the latest of the filing date or the due date for most federal returns. However, exceptions apply for under-reporting income, fraud and failure to file:

  • If you under-report income by more than 25%, the statute of limitations is extended, and you should keep your records for six years.
  • If you file a fraudulent tax return, there is no statute of limitations, and the IRS may investigate at any time. In that case, you must keep your records indefinitely.
  • If you don't file a tax return, there is no statute of limitations, and the IRS may investigate at any time. In that case, you must keep your records indefinitely.

2. You should also keep tax records if you file a claim for refund after you file your return.
Hold onto those records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.

3. Keep copies of your filed tax returns. You may need them to assist in preparing your future tax returns or to check on the status of a refund. You'll also need them if you have to file an amended tax return.

4. Supporting documents for tax returns should be held onto for as long as you retain the tax returns. Supporting documents include canceled checks, old bills and bank statements. It also includes records relating to property until the period of limitations expires for the year in which you sold or transferred the property.

5. Exceptions apply for certain kinds of property. If you claim depreciation, amortization, or depletion deductions -- or other deductions which may be ongoing -- you will need to keep those records for as long as you own the property. You'll need those records to ensure even compliance from year to year. You'll also need those records to support cost basis and other tax consequences at sale, gifting or other disposition of the property.

6. Exceptions also apply for special deductions and credits. If you file a claim for a loss from worthless securities or bad debt deduction, you should keep those records for 7 years. Ideally, you'll keep brokerage statements, promissory notes and other related documentation.

7. Hold onto employment tax records for even longer.
If you have employees, including household employees like nannies and maids, keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later. This should include tax forms (like forms W-2 and W-4), as well as time cards, canceled paychecks, reimbursement records and benefit forms.

8. Keep your records organized by year. Divide your records into things you can easily get your hands on for the current tax year and "old records." Here's a handy list for what you might need to access quickly for the current tax year.

9. Rules may vary for non-tax-related financial records. When your records are no longer needed for tax purposes, don't just throw them out without checking whether you have to keep them longer for other purposes. For example, your insurance company or mortgage company may require you to keep them longer than the IRS does.

10. Don't be afraid to scan receipts. There's no rule that you have to keep paper records. The IRS has accepted scanned receipts since 1997. The applicable rule is Rev. Proc. 97–22, which mandates that your scanned or electronic receipts must be as accurate as your paper records. Additionally, you must be able to index, store, preserve, retrieve, and reproduce the records. In other words, you need to have your records organized and be able to produce them in a hard copy form if needed. The integrity of the system is on you, and the failure of the system is not a valid excuse for not having accurate records. So choose a system that you trust -- and make sure that it works!

While it's important to keep your tax and financial records in the case of audit (or other non-tax issue), there's no reason to keep all of your papers indefinitely. If you get organized once, each tax season can be your reminder to do some spring cleaning -- throw those papers out that you definitely don't need anymore. It will help make room for your new records.

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