Before I started doing my taxes myself, I had a CPA and each year I would receive a manila folder from him that was almost an inch thick containing a copy of my tax return and all the supporting worksheets. I think that was his way of justifying how much I was paying him for tax services. That folder would join the other folders from previous years in a big file cabinet never to be taken out again… until last fall when I had to move the cabinet to paint the room.
Maybe you are in a similar situation and have years or even decades of previous tax returns and receipts taking up your shelves and are wondering how long you need to keep them around in case you need them.
Turns out the IRS does have a recommendation for how long you should keep your old tax records. The length of time, which the IRS calls the period of limitations, is how long during which you can amend your return to claim a refund, or the IRS can assess additional tax. By “assess”, they mean an audit.
Generally, the IRS says that you should keep your income tax records 3 years after you’ve filed your taxes. This is how long they have to audit you. But they also state that if they find a substantial error, they can go back up to 6 years. If you are reading this in 2018, Congratulations! You can stop worrying about being audited for your 2012 taxes.
However, there are exceptions to this rule. If any of the stipulations in the below table apply to you, you should keep your records for at least the period of limitations stated.
|If you…||Keep records for|
|Filed a return and the below does not apply to you||3 years|
|Filed a claim for credit or refund after you file your return||3 years or 2 years from date tax was paid, whichever is later|
|You did not report income that was more than 25% of your gross income||6 years|
|You filed a claim for a loss from worthless securities or bad debt||7 years|
|Did not file a return||No limit|
|Filed a fraudulent return||No limit|
Keep in mind that in addition to keeping the tax return for the time period stated, you also need to keep all supporting documentation and records to go with those returns. Supporting records can include:
- Income: W-2’s, 1099’s, K-1’s, bank and brokerage statements
- Expenses and Deductions: Receipts, invoices, charitable contributions, gambling losses, alimony receipts, child support payments, credit card statements
- Property: Closing statements, insurance records, mortgage interest, property tax assessments
- Retirement: Plan documents, adoption agreements, IRA contribution records, annual summaries
One thing to note is that if you are a real estate investor and you’ve purchased residential property to rent out and are depreciating it on your Schedule E, you have to keep the records relating to the property until you dispose of it. This could be upwards of 27.5 years until you sell it.
States Can Have Their Own Statute of Limitations
As if taxes weren’t complicated enough, these states have a statute of limitations that is different than the IRS’s:
- Arizona, California, Colorado, Kentucky, Michigan, New Jersey, Ohio, Texas, and Washington, Wisconsin – 4 years after a return is filed
- Kansas – 3 years after the latest of: 1) date the original return is filed 2) date the original return is due 3) date the tax due on a return is paid. Taxes can also be assessed up to 1 year after an amended return is filed if it is later than the above dates
- Louisiana and New Mexico – 3 years after December 31 of the year that the taxes are due
- Minnesota – 3.5 years from the date a return is filed or is due, whichever is later. If taxes are underreported by more than 25%, 6.5 years.
How Long Should You Really Keep Your Tax Documents
The thing about following the IRS recommendations on how long to keep your tax documents is they don’t actually tell you how long you need to keep your tax returns. They avoid giving you an actual number. They have a notation that says to “keep copies of your filed tax returns” to help in preparing future returns and that is it. When they say to keep “records”, they are really talking about the supporting documents such as W-2’s and 1099’s.
Once you’ve destroyed your tax documents, they are gone forever. Yet the IRS has no limit to how far back they can request your records if they think there was fraud committed on your taxes.
This is why you should try to keep your tax returns indefinitely, and keep the other records at least up to the recommended period of limitations if not longer.
As a business owner, I keep copies of all my bank statements, credit card statements, 401k account statements, invoices, and receipts for business expenses going back to when I first started about a decade and a half ago. I even regularly click “no” when the credit card companies ask me to switch to paperless delivery because should I ever close my account, I may loose access to all the statements stored online on their site unless I regularly login and download the statements.
For those who aren’t business owners, you still want to keep your tax returns indefinitely to protect your Social Security and retirement benefits. When retirement rolls around thirty or forty years later and you discover a mistake had been made in your income history, you will need your tax returns and other documents to fix the error and avoid being short-changed on your Social Security payments.
Going Paperless: A Better Way To Keep Organized
Keeping decades of financial statements and records is a lot of paperwork to file away or carry around every time you move. I probably had close to a hundred pounds of papers in my file cabinet. You may be tempted to get rid of some of the clutter, but Murphy’s Law says the instant you throw something out you are going to need it again.
Even if you are extremely diligent in keeping records, a fire from making pizza rolls, a flood from a pipe bursting, or a natural disaster could result in everything being lost. Plus, who wants to keep papers with sensitive financial information sitting around and risk identity theft.
A better solution for keeping records forever is digitalizing your paper records by turning them into bits and bytes. An entire file cabinet can fit into the palm of your hand on an USB thumb drive. It will take up less space, be more portable, and you can keep copies in multiple locations to ensure everything is backed up.
To turn your statements, tax returns, receipts, and other papers into digital files you will need a document scanner. Don’t even try using a flatbed scanner or taking pictures on your phone because it will take hours if not months if you have a lot of documents piled up. Two highly recommended scanners are the Fujitsu ScanSnap 1300i and the ScanSnap iX500. Both these scanners will do one pass double-sided scanning and with an automatic document feeder, all you need to do is load it up and go. They can easily scan documents, receipts, business cards, and photos with the push of a button.
The ScanSnap 1300i has a 10 page document feed and can scan 12 pages a minute and is adequate for home use. For higher scanning volumes, the ScanSnap iX500 has a 50 sheet feeder and can scan twice as fast at 25 pages a minute. The iX500 also has wifi so it can scan directly to the cloud without the need for a computer.
Both these scanners also has the ability to make searchable PDF’s by using optical character recognition (OCR) so you can easily find your documents later by searching for keywords within them. This beats going through a big stack of receipts one by one looking for a specific one from Staples.
For free basic storage, you can keep a copy of the scanned documents on your computer and backup a copy to Google Drive or Dropbox. If you want additional organizational features such as tagging, sharing, adding reminders, and searching for text within images, you can scan your documents directly into Evernote with the Fujitsu scanners.
How long do you keep your tax records and returns? Are you still keeping paper copies or have you switched to digital?