To Shred or Not to Shred: How Long to Keep Your Tax Records

by Jeff Rose on 27 July 2011 7 comments
Photo: PeskyMonkey

Maybe you've heard of that seven-year rule? It says that you should keep all your receipts and records for at least seven years. That's not true in all cases, but knowing what you should keep, and how long you should keep it, can be confusing and complicated. According to the IRS website, there are no hard and fast rules on how long you should hang onto documents. Nor are there rules for how you should keep them (paper copies, online, or scanned and stored to a hard drive). You will just need to have access to them if you should ever get audited or need them for other purposes. (See also: 6 Quick Tips for Organizing Your Finances)

The Tax-Review Period

The basic period for IRS tax review is three years. Yes, that means that even if you filed your taxes this year, got your refund or paid your taxes due, the IRS can audit you for up to three years. If it is suspected that you filed a fraudulent claim, or you owe more taxes, there is a chance you could be asked to show some documentation. So a good rule of thumb is to keep everything related to your taxes for at least three years.

Special Circumstances

Outside of the three-year tax review window, there are other reasons that you could be audited or asked to show your tax documents. The length of time the IRS has to ask for these documents varies. Here are some examples:

  • If you goofed on reporting your income by more then 25%, the IRS can audit you and ask to see proof of income for up to six years. So it's a good idea to hang onto your tax-related documents if you think you may have under-reported your income in any way.
     
  • If you didn't file a return but should have, you need to keep your tax records indefinitely.
     
  • If you amended your tax return to get an additional refund, you should keep your tax records for three years from the date of your amended return.
     
  • If you filed a fraudulent return, there is no limit on how long you should hang onto your tax records.
     
  • If you claimed a loss from a worthless security, then you need to hold onto those records for seven years.

Other Reasons to Keep Records

Even if you don't need some of your records for IRS purposes anymore, you may want to consider if you need them for another reason before tossing them. For instance, you may need documents related to your home for insurance purposes. If you own an item or piece of property, it's a good idea to hang onto any documentation related to those items. You could find yourself needing them for a warranty or return.

It's also a good idea to hang onto your past income tax returns. There are so many programs that require proof of income, such as food stamps and medical aid assistance, and usually furnishing a past tax return is all the proof you need. It's also helpful in having past tax returns to prepare future returns.

When we decided to build our first home a few years back, our bank was a stickler about having proof of income — primarily because I had recently transitioned to the realm of the self-employed. I had to provide both proof of income as well as a recently filed tax return.

In any case, it's a good idea to hang onto all tax records for at least the three-year period that you could be audited.

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Guest's picture
Andy

This statement is critical;

If you didn't file a return but should have, you need to keep your tax records indefinitely.

My co-worked was audited by the State of N. Carolina for a return they said he failed to file 11 years ago. He could not find his documents and the IRS doesn't keep records that long so they couldn't provide him a copy. They basically said "if you can't produce the documents we assume you owe us the money plus interest plus penalties". He eventually found his statement and never heard from them again. I suggest you keep everything forever.

Jeff Rose's picture

@Andy

Wow! Thanks for sharing that story. Really drives the point home!

Guest's picture
Guest

It might be worth keeping those tax records longer. When I got my estimate from Social Security, it turned out that a company I had worked for had neglected to report my FICA for a whole year. Having the W-2 available made it possible to have that corrected so that I got credit for that income and get all the benefits I paid for.

Jeff Rose's picture

Good example to share. It definitely won't hurt to keep the records a bit longer.

Guest's picture

We've started scanning our tax documents and storing them in three locations. This way we can keep them in a PDF format and do not have to worry about storing the paper.

Guest's picture

Great thoughts! I never knew that they could audit you for a tax return from 4 years ago until I was audited. I made a mistake on a tax return and was audited 4 years later. I had to provide proof of the medical expenses I claimed. While I couldn't provide proof for the entire amount (because I transposed a number by accident), I only had to pay the difference. Had I not kept those records, I would have had to pay a lot more.

Guest's picture
Echo

I like that I can keep electronic copies now since I found it a pain to keep all of the paper files (hate clutter). Only problem is keeping a proper back-up in case your computer crashes.