Some people never throw away tax records because they’re afraid of an IRS audit. If you’ve got dusty piles of old tax returns stacked up, it’s a good idea to determine what you can get rid of and what you should keep.
Here’s the IRS rule of thumb: If you have filed a return every year, reported all your income and done nothing fraudulent, keep tax records for three years.
Here’s what to know about how long to keep records, which ones to keep and how to safely get rid of them.
How long to keep your tax records
In most cases, the IRS has three years after you file a return to audit you, which is why three years is the recommended amount of time to keep most tax documents. “The IRS requires you to keep the records so you have a backup where you can prove everything you put on your tax return,” says Kristin Ingram, CPA and head of Ingram Digital Media Inc., which teaches small business owners and college students about bookkeeping and accounting.
In certain circumstances, however, the IRS says you should keep records longer:
|If you …||The the period is …|
|File a return and the next three situations below do not apply to you||3 years|
|Fail to report all your income and it’s over 25% of the gross income shown on your return||6 years|
|File a fraudulent return||No limit|
|Do not file a return||No limit|
|File a claim for credit or refund after you filed your return||3 years from date return filed or 2 years after tax paid, whichever is later|
|File a claim for a loss from worthless securities||7 years|
|Have employment tax records||4 years|
Your insurance company or creditors may require you to keep records longer than the IRS does, so verify that before you start discarding paperwork.
Examples of documents to keep
Generally, the IRS recommends keeping all documents that prove how much income you earned and anything that supports credits or deductions you claim. Don’t worry about keeping every single document if you’ll get one record at the end of the year that summarizes the information, Ingram says. For example, your W-2 is a summary of all your paychecks.
Here is a rundown of some of the basic tax documents you should keep on file for three years, provided you have been filing honest, complete returns every year.
|For items concerning your …||Keep as basic records|
Canceled checks or other proof of payment
Annual bank statements
Purchase and sales invoices
Proof of payment
|Investments||Annual brokerage statements
|Retirement accounts||Form 5498, Roth and traditional IRA contributions
Form 8606, nondeductible IRA contributions
401(k) and other company-sponsored plan statements
Form 1099-R distribution records
|Health insurance||Form 1095-A, Health Insurance Marketplace Statement
Form 1095-B, Health Coverage
Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
Time limit exceptions
If the IRS suspects you’ve underreported your income by 25 percent or more or has questions about a worthless stock write-off, it can come calling on you up to six years later.
If you think you might need to prove to the IRS that you didn’t underreport income or lie on your return, keep your records longer.
For example, the IRS may notify you to tell you it found an error on your return. Or maybe you found the error, and you need your records to file an amended return. You might even need a previous year’s tax records to fill out the current year’s.
During a review, the IRS examines your accounts and financial information to ensure everything is reported correctly, and puts the burden of proof on you to produce supporting documents. Having your tax records at hand, whether electronically or as a paper file, makes it easier to answer the IRS’ questions.
How to organize your records
The IRS urges taxpayers to keep their records “in an orderly fashion” and in a safe place. “As long as you can provide the documentation when needed, it doesn’t matter how you keep it,” Ingram says.
Start a filing system, which can be digital or with paper records. Organize the documents, first by year and then by category (such as bank statements and income forms). Throughout the year, save and organize your documents consistently so they’ll make sense at tax time.
“Some folks buy a $20 file folder with multiple pockets (‘January–December’ or ‘A–Z’) and stick the receipts in there for each year. Others can take pictures and keep them stored digitally,” says Irene Wachsler, CPA at Wachsler CPA in Burlington, Massachusetts.
Ingram uses an app called CamScanner, which converts phone pictures to PDFs that you can label and store. The app makes it easier to snap pictures of any tax documents and organize them.
If you have a small business, Wachsler recommends using a cloud accounting service to track your expenses or hiring a professional accountant. “You’ll save money on your taxes at the end of the year because all of your legitimate expenses will be captured in the accounting system,” she says.
You can always download bank and utility statements and save them to your hard drive.
How to get rid of your tax records
When it’s time to throw out tax files, do so carefully. Use a paper shredder and then toss the shreds into the kitchen trash.
Tax documents contain a lot of sensitive information, such as your Social Security number, address and financial account numbers. Properly discarding these will help you avoid identity theft.