If the IRS or state government questions your tax deductions or business losses, you may need a copy of your return.
Do you need to keep tax returns and paperwork?
Dropping a tax check in the mail doesn't mean you can then throw out the paperwork.
If the IRS or state government questions your deductions or business losses, you may need a copy of your return—not to mention W-2s and other documentation—to prove your return was accurate.
However, there are limits to how far back the government can look.
What tax documentation should you keep?
It’s generally best practice to keep tax forms and supporting paperwork related to:
- Income (W-2s, 1099s, etc.)
- Expenses and corresponding deductions (Invoices, charitable donation receipts, etc.)
- Property (Property tax assessments, purchase records, etc.)
- Investments and retirement accounts (401(k) statements, distribution statements, etc.)
How long you keep each will depend on the statute of limitations that applies. We’ll cover that in more detail below.
How long do you need to keep tax returns according to the IRS?
The IRS recommends taxpayers keep their returns and any supporting documentation for three years after the date of filing; after that, the statute of limitations for an IRS audit expires.
If you've under-reported income by 25 percent, however, the IRS can go six years back, or seven if you claim a loss for bad debt or worthless securities.
If you don't file, or if you file a fraudulent return, the IRS has no statute of limitations; so it may be best to keep your records indefinitely.
How long do you need to keep state tax returns and documentation?
If you're paying state income taxes, the time you need to keep records will depend on state law.
Some states can look back further than the IRS. California and Arizona, for example, have a four-year statute of limitations; Montana has a five-year statute. The period for investigating if the return under-reports income or falsifies data may also be longer.
Best to check with your state tax authorities to get specifics.
How long do you need to keep records of assets?
You might be wise to keep records on assets such as stocks, bonds or your house longer than the statute of limitations suggests.
If you sell a house, for instance, you'll need a record of the purchase price and any improvements you've made to figure out the basis for your capital-gains tax. If you claim depreciation on a rental property or business computer, you'll need records for that, too.
The IRS recommends hanging on to your files for assets until the statute of limitations expires for the year in which you sell them.
How should you organize your tax records?
If you have an efficient record-keeping system, it can make finding information a lot easier. The IRS has no particular standards or requirements for how you organize and file material, neither do state taxing authorities; their only concern is that when they want to see a document, you're able to deliver it promptly.
IRS Publication 552 offers detailed advice on which records to keep, whether they're hard copy or in electronic form.
If you use a TurboTax CD or download product, your tax return will be stored on your computer. It's a good idea to also print a copy for your records and keep a backup file on an external drive or disc.
If you use TurboTax Online to prepare your taxes, we'll keep a secure copy of your tax return for you to access online.
How should you dispose of your old tax documents?
Once the statute of limitations passes, you’re likely ready to clear up some space. If you haven’t already, you might want to upload your documents to the cloud before getting rid of them. That way, you always have them if you need to refer to them for any reason.
It’s important to note that your tax documents include sensitive personal information, so it’s best to dispose of them in the most secure way possible. Instead of simply throwing them away in the trash, shred them yourself, or use a shredding service.
Do you need to keep financial records for years you didn’t file a tax return?
If you didn’t file a tax return, you’ll still want to keep financial records for the year in question. According to the IRS, you should keep records indefinitely if you don’t file a return.
In case it ever comes into question, you’ll be prepared.
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