What you need to know
A lot of folks look like they’re auditioning for the show Hoarders when it comes to how long to keep tax returns. Who can blame them? The IRS isn’t exactly the most popular show in town.
But in reality, how long should you keep tax returns? Do you need to cling to every piece of paper from now until the end of time? Or, is it ok to do an all-out purge? This article will explore everything you need to know.
How long to keep tax returns
What the IRS Says
At a minimum the IRS says you should keep tax returns and any supporting documents for at least three years. For example, this year (2020) you should have everything going back to the 2017 tax year.
Why 3 years? That’s generally how many years the IRS can go back and audit and charge any extra tax. It’s also how long you have to correct an old tax return if you missed all or part of a refund.
There are two types of records you’ll need to hold on to: 1) the actual tax return itself; and 2) source documents (W-2s, 1099s, receipts, etc.). Here are examples of what records to keep if you own these common types of property (click each section to expand):
Keep records that establish cost basis, depreciation, and amortization for at least three years after you sell the property. You should have separate files for each property if you own multiple properties. If you’ve been doing 1031 exchanges keep all records dating back to the original property you started with.
Keep statements detailing purchases (cost basis) in taxable brokerage accounts. As of 2011 brokerage firms must keep track of cost basis for you. This is not the case for a security (such as a stock or mutual fund) bought before 2011, so hang on to records for pre-2011 investments. Most investment firms let you download statements online. You only need to do this for taxable accounts, not IRAs or 401(k)s. You should keep these records for at least 3 years after you sell that security.
Withdrawals from certain types of retirement accounts might be tax-free or partially tax-free. This would be for Roth IRAs, non-deductible IRAs, or post-tax 401(k)s. Keep records of how much you contributed to these accounts in case the IRS ever has questions. Keep these records at least 3 years after you liquidate the account.
...but there are some exceptions
Don’t assume you can run all your tax documents through the shredder as soon as you hit the 3-year mark.
The IRS has outlined a few scenarios in which you should hold on to documents much longer (or forever). Here they are:
What if you forget to include some of your income on your tax return one year? The IRS actually has up to 6 years to audit you if that missing income is more than 25% of your total income that year. For example, your total income is $75,000 but on your tax return you accidentally say $50,000. Leaving off $25,000 means you underreported income by 33%.
Those who are self-employed, freelance, or independent contractors need to especially pay attention here. Why? These folks likely generate income from lots of different sources – all of which will be reported on a separate 1099s (as opposed to bona fide employees, whose income is generally reported on just one W-2 form). It’s easy to see a scenario where one or a few of these 1099s fall through the cracks.
So if you’re self-employed or have a side hustle, keep your 1099s on file for at least 6 years.
Maintain records for bad debt and/or worthless security write-offs for at least 7 years.
The IRS recommends you hold onto records indefinitely (forever) for any year you didn’t have to file a tax return. Why? To have supporting evidence on-hand if the IRS ever wants to double-check that you really were not required to file a tax return that year.
The IRS also advises you keep records indefinitely if you filed a fraudulent return. There is no statute of limitations for fraud! The IRS can go back an unlimited number of years if you’re suspected of tax fraud (called tax evasion).
How long do you need to keep tax returns?
The above recommendations are straight from the IRS’s guidelines. However, there are times when you should hold records even longer than the bare bones minimum. Let’s explore two reasons why:
First, the IRS has the power to look back at least 6 years if you under-report your income. But, chances are you’re not going to realize you under-reported your income. Consider holding on to all records for at least 6 years for this reason.
Second, consider the format of your documents. Are they digital or hard copies? Store digital copies for the long haul. There’s hardly any downside to keeping an ongoing electronic file. With hardcopies, separate the tax return (Form 1040 + supporting schedules) from the backup (W-2s, 1099s, receipts, etc.). Keep the tax return indefinitely and purge the backup documents. The 1040s are important because a third party such as a bank or insurance company may need to review them one day. Depending on your level of zeal you could go paperless by scanning them into your computer.
The Bottom Line
So how long do you need to keep tax returns? The answer is somewhere between 3 years and forever. Ultimately, it depends on what you’re dealing with and the format of the documents. Consider holding on to all your records for at least six years minimum by default. If they’re digital, save them indefinitely – you never know when you might need them.
There is a fine line between meticulous record-keeping and hoarding. Bottom line, it’s better to be safe than sorry when it comes to how long you should keep tax records!
Taylor Hoffman is an SEC registered investment adviser with its principal place of business in the State of Virginia. Any references to the terms “registered investment adviser” or “registered,” do not imply that Taylor Hoffman or any person associated with Taylor Hoffman have achieved a certain level of skill or training. Taylor Hoffman may only transact business in those states in which it is registered /notice filed, or qualifies for an exemption or exclusion from registration /notice filing requirements. For information pertaining to the registration status of Taylor Hoffman or for additional information about Taylor Hoffman, including fees and services, please visit www.adviserinfo.sec.gov.
The information contained herein is provided for informational purposes, represents only a summary of the topics discussed, and should not be construed as the provision of personalized investment advice or an offer to sell or the solicitation of any offer to buy any securities. The contents should also not be construed as tax or legal advice. Rather, the contents including, without limitation, any forecasts and projections, simply reflect the opinions and views of the author. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change without notice. There is no guarantee that the views and opinions expressed herein will come to pass.
This document contains information derived from third party sources. Although we believe these third party sources to be reliable, Taylor Hoffman makes no representations as to the accuracy or completeness of any information derived from such third-party sources and takes no responsibility therefore.
Taylor Hoffman is not a Public Accounting firm, and the information contained herein should not be construed as tax advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their tax advisor for more specifics.
Taylor Hoffman is not a law firm, and the information contained herein should not be construed as legal advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their attorney for more specifics.