It's been more than a week since the tax documents you gathered helped you file your federal return. Now, what to do with all that tax-related material?
In most cases, you want to hang on to it, at least for a while. Just how long, however, depends.
The time frame for hanging on to tax-related material generally is determined by the Internal Revenue Service’s statute of limitations. That essentially means that you need to keep some tax material for as long as the IRS has to take a deeper dive into your filing.
IRS Publication 17, Your Federal Income Tax for Individuals, offers this quick overview of the limitation periods and the records to which they apply.
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Period of Limitations |
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IF you… |
THEN the period is… |
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1 |
File a return and situations 2, 3, and 4 below don't apply to you, |
3 years. |
|
2 |
Don't report income that you should and it is more than 25% of the gross income shown on your return, |
6 years. |
|
3 |
File a fraudulent return, |
No limit. |
|
4 |
Don’t file a return, |
No limit. |
|
5 |
File a claim for credit or refund after you filed your return, |
The later of 3 years or |
|
6 |
File a claim for a loss from worthless securities or bad debt deduction, |
7 years. |
The table above not only covers how long the IRS auditors generally have to question your filing, but also the period of time in which you can amend your tax return.
However, as long-time readers of the ol’ blog know, exceptions do happen, even when it comes to tax records. But one that’s firm is number 3.
If you commit tax fraud, the IRS isn’t bound by any time limit as to when it can come after you. And in these cases, no amount of records is likely to help in your dealings with the IRS examiners or its law enforcement agents in IRS Criminal Investigation.
Retain some records longer: Personally, I tend to hold onto my records that go beyond the statute of limitations until I run out of storage space, like happened back in 2020.
But I also make room for one record to keep in perpetuity. I have copies of the actual tax return I file each year going back to my earliest tax paying days. And yes, I do still get a kick out of looking at the first joint return the hubby and I filed.
Tax nostalgia aside, a prior Form 1040 comes in handy when you need financial information for such things at loans. Your most recently filed return also is a good starting point every filing season as you work on that current tax filing.
You also need to hold investment tax records, like the statements showing reinvested earnings on which you paid taxes, until you’ve totally disposed of the asset. Even then, when you report the eventual sales’ capital gains (or losses) on your return, you’ll want to keep the statements just in case the IRS has questions years down the road.
The same longer-term record keeping also applies to real property records.
You’ll need the information on, for example, home improvements that add to your residence’s basis. That number will help you determine your house’s taxable basis, which it turn will hopefully lower any potential capital gains tax you might owe when you sell your personal real estate.
Creating a record keeping system: Okay, you have all this tax material. How do you save it in a way that’s efficient and accessible if you need it? That’s your call.
Except in a few cases, which generally are related to business operations, the law doesn't require you to use any special kind of record keeping system. You may choose any method as long as it clearly shows your income and expenses.
So, if you’re into old-school paper documentation and have the space, fill up as many filing cabinets as you need (and have room for) with tax records as you need.
Or you can maintain your records digitally. This can be on your computer, a flash drive, or in the cloud. A combination of such electronic storage probably is a good idea, since we all know that sometime modern technology can be problematic.
That’s also why you need to back up your tax records just like you do all other electronic aspect of your life.
The IRS is fine with electronic record storage as long as it meet the same standards it applies to hard copy books and records. That means when you replace the paper versions, you must maintain the electronic storage systems for as long as they might be needed under the tax statutes of limitation.
The bottom line is to choose a record keeping method, implement it, and stick with it each passing tax year. It’s tax insurance that you hope you never need, but are glad to have if the worst ever happens.
You also might find these items of interest:
- 7 tax record keeping FAQ
- Time for tax and other record keeping tasks
- Tips on rebuilding tax and other records lost in a disaster
- IRS audit statute of limitations guides tax record keeping
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