How Far Back to Keep Tax Records: A Comprehensive Guide

Understanding how far back to keep tax records is essential for every taxpayer. Proper recordkeeping not only helps you stay organized but also ensures you have the necessary documents in case of an IRS audit or any tax-related issues. In this comprehensive guide, we will discuss the different record retention rules and provide tips on organizing and maintaining your tax records effectively.

Why Is It Important to Keep Tax Records?

Keeping tax records is crucial for several reasons:

1. Documentation for IRS audits: In case the IRS audits your tax return, having well-organized records can provide necessary documentation and support for your claimed deductions, credits, and income.
2. Tracking your financial history: Proper tax recordkeeping can help you track your financial history, monitor your income and expenses, and plan for your financial future.
3. Filing accurate tax returns: Accurate recordkeeping ensures that you report the correct information on your tax returns, minimizing the risk of errors and potential penalties.

General Rule: Keep Tax Records for Three Years

The general rule for retaining tax records is to keep them for at least three years from the date you filed your original return or the due date, whichever is later. This is because the IRS typically has three years to audit a tax return. However, there are some exceptions to this rule, which we will discuss below.

Important to note: Since COVID-19, the IRS has been incredibly backlogged. To combat this, the IRS often will send out notices on tax periods that are about to have their statutes of limitations expire. These notices can extend the statute of limitations, and you should keep anything related to a tax period you receive a notice for.

Exceptions to the Three-Year Rule

There are specific situations where you should keep your tax records for a longer period:

1. Keep records for six years if you underreported income: If you underreported your income by more than 25%, the IRS has six years to audit your return. In this case, you should retain your tax records for six years from the date you filed your return or the due date, whichever is later. Underreporting income can carry severe civil and/or criminal penalties. If you're aware of an underreporting, consider amending your tax return and/or speaking with a qualified tax professional.
2. Keep records indefinitely if you filed a fraudulent return or didn't file a return: If you filed a fraudulent tax return or failed to file a return, there is no time limit for the IRS to audit your return. In these cases, it's best to keep your tax records indefinitely. Filing a fraudulent return can carry severe civil and/or criminal penalties. If you're aware of fraud on your tax return, consider amending your tax return and/or speaking with a qualified tax professional.
3. You voluntarily extended the statute of limitations: Requesting a payment plan, installment agreement, offer in compromise or settlement can extend the statute of limitations in some situations.
4. You received a notice for a tax period in recent years, and have not heard anything else: Since COVID-19, the IRS sends out notices to combat the backlog and keep statutes of limitations open. It's strongly recommended to look into any notices received from the IRS immediately - do not ignore notices! Consult a tax professional if you're not sure what to do.

Specific Record Retention Periods for Different Documents

Some tax documents have specific retention periods:

1. Employment tax records: If you're an employer, you should keep employment tax records, such as W-2s and payroll tax returns, for at least four years after the due date of the tax or the date the tax was paid, whichever is later.
2. Property records: Keep records related to property, such as purchase documents, improvement receipts, and depreciation schedules, for as long as you own the property plus three years after you sell or dispose of it.
3. Investment records: Maintain records of stock and mutual fund transactions, dividends, and capital gains for as long as you own the investments plus three years after you sell them.

Organizing and Storing Your Tax Records

To keep your records organized and easily accessible:

1. Sort documents by tax year and category: Organize your records by tax year and separate them into categories, such as income, deductions, and credits.
2. Digitize your records: Scan and save digital copies of your important tax documents. This ensures that you have a backup in case of physical damage or loss.
3. Use secure storage: Store your physical and digital tax records in a safe and secure location, such as a fireproof box or an encrypted cloud storage service.
4. Create a record retention schedule: Establish a schedule to review and purge old tax records according to the appropriate retention periods.

Conclusion

Understanding how far back to keep tax records and adhering to the appropriate retention periods is essential for every taxpayer. While the general rule is to keep tax records for at least three years, certain situations require longer retention periods. Remember to consider the specific retention periods for different types of documents, such as employment tax records, property records, and investment records.

By organizing and securely storing your tax records, you not only protect yourself in case of an IRS audit but also make it easier to file accurate tax returns and track your financial history. Creating a record retention schedule and regularly reviewing your documents can help you maintain an organized and efficient tax recordkeeping system.