The IRS generally has three years to audit a tax return (from the latter of the return’s due date or filing date). And taxpayers can file an amended return during this period if they’ve overlooked or reported incorrect information they want to change. To help ensure you’ll have what you need to respond to an audit, amend a return or potentially for other purposes, retain tax records as follows.
Federal Taxes
Regardless of the three-year audit/amendment period, many tax advisors recommend retaining copies of finished tax returns indefinitely. At a minimum, keep final returns for six years after they were due or were filed, whichever is later. Within the three-year window, keep records that support items on your individual tax returns. Supporting records include canceled checks, charitable contributions receipts, mortgage interest payments and retirement plan contributions.
So which records can you throw away now? Based on the three-year rule, you can recycle most supporting records associated with your 2022 return, assuming you filed it on time. If you asked for an extension and filed by Oct. 16, 2023, wait a couple of months before tossing these documents.
Also, know that some tax issues are subject to scrutiny for more than three years. For example, if the IRS suspects that income has been understated by 25% or more, the statute of limitations for an audit increases to six years. If no return was filed or if the IRS can assert fraud is involved, there are no time constraints to initiate an audit.
Note too that supporting records can back up tax return items — such as carryovers of charitable deductions — over several years. So be careful to save these documents for as long as you need them to support deductions. And keep records that support deductions for bad debts or worthless securities that could result in refund claims, because you have up to seven years to claim them.
State Tax and Other Documents
State laws determine how long you should retain state tax records, so check with your state’s revenue department or your tax advisor. States generally have the right to resolve their own issues related to federal tax returns that have been audited. So if you’re audited by the IRS, hold on to those records for a year after the audit is completed. Also, you may be required to amend your state return after federal adjustments have been made.
For real estate documents, hold on to them as long as you own the property, plus three years after you dispose of the property and report the transaction on your tax return. As you buy and sell real estate, keep records of purchases, improvements, relevant insurance claims and refinancing documents. These records help prove the adjusted basis in a property — such as your primary residence — which is needed to figure any taxable gain at the time of sale. These supporting documents can also support rental property or home office deductions.
As for investment records, you should maintain detailed records of purchases and sales of securities, including cryptocurrency transactions. Records should include, where applicable, dates, quantities, prices, dividend reinvestment and expenses information. As with real estate, keep these records for as long as you own the investments, plus additional time until the statute of limitations for the relevant tax returns expires.
Finally, the IRS requires taxpayers to keep copies of Forms 8606, 5498 and 1099-R until all money is withdrawn from IRAs. It’s even more important to retain records of transactions relating to Roth IRAs.
Dispose of Them Properly
To prevent identity theft, dispose of old tax records properly. Paper records should be shredded using a cross-shredding machine and digital files should be permanently deleted. Be sure to wipe the memory of any device you used to prepare tax returns before recycling or donating them. For more about tax record retention, talk to a tax professional.
CRN202907-11726944