What Records Should You Keep
It’s important to keep any and all forms and documents you sent to the IRS as well as paperwork supporting the information you provided the agency. For example, if you claimed a specific business expense as a tax deduction on your return, you’d want to keep the receipt and/or account statements.
Key documents you’ll want to hang onto include:
- Your 1040 form and other forms submitted to the IRS
- Property records
- Forms showing mortgage or student loan interest
If there is any chance the IRS might ask to see a particular document as part of an audit, it’s a good idea to make sure you have it available.
Keeping Up With 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 returnnot to mention W-2s and other documentationto prove your return was accurate.
However, there are limits to how far back the government can look.
Back Up Digital Files
After you save the files to your computers hard drive, back them up to an external flash drive just in case you lose internal storage data. Scammers sometimes infiltrate hard drives and block peoples access to documents, so youll want backup copies they cant reach.
Store the external drive someplace safe, like a locked deposit box. And keep backing up your files periodically as you erase old ones and store new ones.
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How Long Should Businesses Keep Tax Returns And Other Business Tax Records
Fortunately, the IRS cannot assess additional tax once a certain periodcalled the statute of limitationshas passed. The federal income tax statute of limitations equals:
- three years from the filing dateor the due date, if laterfor most tax returns
- four years after the tax becomes dueor gets paid, if laterfor employment tax returns
- six years from the filing dateor the due date, if laterfor tax returns that underreport gross income by more than 25%
- seven years from the filing dateor the due date, if laterof the related tax returns for losses from worthless securities or bad debt
- Forever for unfiled or fraudulent tax returns
Some state taxing authorities follow IRS rules, while others use different periods. Creditors and investors may have their own requirements.
Creating different retention policies for each possible scenario may prove impractical. Retaining tax returns and other records for seven yearsstarting from the later of the filing date and due date of the related tax returnoffers a convenient rule of thumb. This covers almost all documents for businesses that file all required tax returns without fraud.
What Are The Best Practices When It Comes To Record
There are lots of ways to keep documentation organized and secure:
- Recognize risky behavior Watch out for online scams. Phishing emails and clickbait might appear to come from family members, your bank or credit card company, or the IRS itself. In addition, be mindful of unusual behavior consisting of mailings or phone calls that claim to be from the IRS, traditionally the IRS will never call an individual, and if youre in doubt about any mail received, you can always call the IRS to confirm a letter, call, or email authenticity.
- Use a password Password protect everything possible. A strong password can help you avoid cyberattacks.
- Dont use the same password for multiple applications or files.
- Protect yourself digitally Install and use a firewall, antivirus programs, software security, and methods of encryption.
- Mask or remove your and family members Social Security numbers from all documents
- Protect hard documentation Whether in a safe or a shoebox, hard documentation should be consolidated and kept safe in one secure location. Consider scanning all documentation and keeping it on a secure hard drive or in secure cloud-based storage.
- Dont follow a link, click on an email link, or call back the phone number listed in a suspicious email.
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Tax Returns Related To Property
Income tax returns related to property have slightly different rules. This rule really applies to any real property that you might own. It could be your personal home, a rental home, or other property which you might own. You need to keep these records until the period of limitations expires for the year in which you dispose of the property. So, if you own a rental property and report gross income from that property on your returns for 20 years, then you may have some returns that you must keep for over 20 years. The returns must be kept because they must be used to figure depreciation, amortization, or the depletion deduction as well as any capital gains that you may experience from the sale of the property.
If you acquired property or real estate through a nontaxable exchange, then you must keep those records even longer. You must keep all the records from both the new property and old property until the period of limitations expires for the year in which you dispose of the new property. These records must be kept to prove your tax basis in the property. Any gains calculated from the property are not always as simple as subtracting the purchase price from the sales price.
How Long Should You Keep Employment Tax Records
The IRS suggests retaining employment tax records for a minimum of four years after the tax becomes due or has been paid, whichever is later. Employment tax records include:
- employees’ names, addresses, social security numbers, dates of employment, and occupation
- wages, annuities, and pensions paid to employees with dates of payment
- taxes withheld including FICA and Medicare
- records of tips and fringe benefits paid if applicable to your business, and
- 1099 documents for independent contractors.
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How To Store Your Tax Documents
If you use online tax software to file your tax returns, the software will generally keep copies of your returns for you from year to year. However, you can’t always count on being able to access those forms when you need them.
While it’s unlikely that major tax-filing programs will just shut down without giving you time to obtain your records, you still don’t want to be 100% dependent on them to fulfill your obligations to the IRS. As a result, it’s a good idea to print a paper copy of your returns and keep them in a safe place in your home — or at least download your forms to your own computer.
Your tax-filing software also won’t keep receipts for your deductions or credits, nor will they keep things like bank and brokerage statements that the IRS may want to see. These documents should all be kept together, ideally with paper copies of your returns.
Keeping your returns and documents will both ensure you’re ready to answer questions if the IRS comes calling and will also help you file your returns in later years when you can refer back to forms from the past.
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Regular Statements Pay Stubs
Keep either a digital or hard copy of your monthly bank and credit card statements for the last year. Its a good idea to keep your digital copies stored online if you choose to go paperless. You should also hold on to pay stubs so that you can use them to verify the accuracy of your Form W-2 when tax season arrives.
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Paper Vs Electronic Records
In the digital world, recordkeeping is simplerand takes a lot less physical space! The IRS has determined that electronic records are the same as paper originals. In some cases, electronic is preferred, since paper receipts can fade and become illegible over time. But, if youd prefer to store all your files digitally, feel free to do so.
However, one word of caution: its easy to rely on your financial service provider to access your account information and history. For example, you might log into your online account to view monthly or yearly statements.
Be sure to check the terms of each account to see how long they keep historical records. If its shorter than 7 years, you may need to download and save an annual statement in order to have it on hand for tax recording.
Lastly, keep in mind that youll need to keep originals for important documentation. These are things like articles of incorporation, business licenses, partnership agreements, and any signed contracts.
Many companies store such documentation in a corporate binder. Keep the binder in a safe space . Its one of the first things that will be requested should you want to sell your company or be involved in an audit or lawsuit.
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Period Of Limitations That Apply To Income Tax Returns
The following questions should be applied to each record as you decide whether to keep a document or throw it away.
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According To The Irs What Is The Period Of Limitations
The period of time when you are still able to amend your tax returns to claim a tax credit, or refund, is called the period of limitations, according to the IRS. During this time, the IRS may still assess you with additional tax liabilities. Specific examples of this are listed later in the article. Unless stated otherwise, a time period of limitations refers to years after the taxes were filed. Tax returns that were filed early are considered filed on the tax deadline, usually around April 15th. For 2020, this will be July 15th. However, the time period of limitations for returns filed on extension will be years from the actual date the taxes were filed.
Keep copies of your filed tax returns indefinitely. Having access to copies of your older tax returns may help in preparing future tax returns and making computations if you need to file an amended return. With the help of scanning and cloud storage, I dont see many reasons to delete older tax returns. I think we could all save a lifetime of tax returns on our computers without putting a dent in our storage limits.
Period of Limitations that apply to income tax returns via the IRS website
1. Keep records for three years if situations , , and below do not apply to you.
2. Keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later if you file a claim for credit, or refund, after you file your return.
How Long Should You Keep Tax Documents
Tax record storage is helpful for everyone, but its especially crucial if you have more than one source of income, your income changes from year to year, or your taxes are otherwise paperwork-heavy.
While three years is the standard for state and federal tax returns and most tax-related paperwork, there are some documents youll want to keep for longer.
| Timeframe | |
|---|---|
| Pay stubs monthly investment statements monthly health plan statements | |
| 3 years | Federal and state returns proof of income annual retirement statements and contributions investment income homeowner paperwork charitable contributions |
| 4 years | Employment tax records |
| 6 years | Business expenses and paperwork |
| 7 years | Records of early withdrawals on retirement funds bad debt deductions securities losses |
| Indefinitely | Records of capital assets documents for any years you didn’t file a return |
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Always Verify The Accuracy Of Your Earnings Record First
The Social Security Administration keeps track of your income in your Earnings Record, which you can access by creating a my Social Security account. This is the income that’s ultimately used to calculate your Social Security benefit when you’re ready to claim, so it’s important to make sure it’s correct. It usually is, but little things such as accidentally transposing digits in your Social Security Number when filling out paperwork with a new employer or forgetting to notify your company about a name change can result in income that’s reported incorrectly or not reported at all.
If there are errors in your Social Security Earnings Record, you’ll need your old tax returns to prove your real earnings to the Social Security Administration. You must submit a copy of your old tax return for that year or any other paperwork you have with a Request for Correction of Earnings Record form. If you don’t have any documents to prove your claim is legitimate, the Social Security Administration may not do anything about it, and then you could lose tens of thousands of dollars or more in Social Security benefits over your lifetime.
Disposing Of Old Tax Returns
So, you have finally reached the period of limitations on some old returns and you are ready to dispose of them. What now? What is the appropriate method for getting rid of those old returns? You should not simply throw your old documents into the trash. There is way too much sensitive data and personal information that could be obtained by a criminal. At a minimum, you should shred these documents before disposing of them. Make sure that you use a shredder that cuts them into fine pieces so that someone cannot easily reassemble the documents to obtain your personal information from them.
If you store your records electronically, make sure you keep this in mind when getting rid of an old computer. Those documents and records might still be accessible even though you think you have deleted them. If necessary, you should consult a computer expert to ensure that the files are completely removed from your PC before you give it to someone else.
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How To Store Your Files
There are many ways to store important documents. Weltman says its a good idea to use a fireproof safe or password-protected electronic file for documents such as bank and investment statements, estate-planning documents, pension information, pay stubs, and tax documents.
She also says you may want to invest in a safe deposit box for papers that cant be easily replaced. These include original birth and death certificates, Social Security cards, passports, life insurance documents, and marriage and divorce decrees.
As an extra layer of security, scan your documents, making sure they are clear copies, says Herron. You should also back them up to the cloud. To protect your data, make sure the storage provider uses encryption technology. You can also store copies of your files in folders on an external hard drive that is password-protected.
Penelope Wang
I cover everything from retirement planning to taxes to college saving. My goal is to help people improve their finances, so they have less stress and more freedom. What I enjoy: walks through the city, time with family, and reading mysteries, though I rarely guess who did it. Follow me on .
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Limitation Periods And Proper Timelines
As a rule of thumb, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.
A back trail of all your documents within the three-year and the seven-year timeframes, respectively, may turn out to be essential.
Lets break it down further.
How Long Do You Need To Keep Your Tax Records
When we moved into our first housean old Victorian twin in Philadelphiathe extra bedroom on the second floor quickly became a catch-all for boxes, papers, and books.
When it came time to convert that room to a nursery for my daughter, we were finally forced to unpack some of the boxes and get organized. When I mentioned to my neighbor that I found it all very stressful, she agreed, explaining thats why they had never tackled the boxes in their basement from their initial movein 1976.
While 1976 does feel a bit like overkill, its often the case that many of us hang on to far more paper than we need to. It can be scary tossing papers that you worry you might need in the future, especially when it comes to tax and financial records. Tax professionals like me often stress the importance of hanging onto tax-related receipts, but dont fall into the trap of believing that you have to keep all of your tax and financial records forever.
Its OKand honestly, encouragedto regularly sort through your records and toss those that are no longer important. Here are some tips to help you figure out which records to keep and how long to keep them.
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