How long should you keep your tax records?
By Aaron Crowe
Somewhere deep in every home office, thrown in haphazardly or filed semi-neatly in a file drawer, are years' worth of tax returns and records that support them.
Sooner or later the files get so big that the drawer or cabinet is busting open, creating a paper mess that could be explored on A&E's "Hoarders" TV show. My one file drawer of old tax files probably isn't enough to get my office profiled on the show, but I don't want to take any chances. I'm cleaning it up.
To start, I went to IRS Publication 17 for how long to hold on to tax records. Seven years looks to be the basic outer limit for keeping most tax records, and it lessens from there depending on the situation. The records to keep are tax-related documents that help identify sources of income, track expenses, determine property value, or are used to prepare tax returns or support claims made on the returns.
The documents should be kept for a certain number of years after a tax return was filed. For example, if a tax return for income made in 2011 was filed in April 2012, and a document should be kept for seven years, it's safe to get rid of it seven years after the tax return was filed -- in 2019 and not 2018.
Here are some of the IRS guidelines. We'll start with the one for any dishonest tax filers out there:
- If you file a fraudulent return or don't file a return, keep records indefinitely.
- If you don't report income that you should report, and it is more than 25 percent of the gross income shown on your return, keep records for six years.
- If you owe additional tax and didn't report income that you should have reported, or didn't file a return or didn't file a fraudulent return, keep records for three years.
- If you file a claim for credit or a refund after you file your tax return, keep the records for three years.
- If you file a claim for a loss from worthless securities or bad debt deduction, keep the records for seven years.
- Keep all employment tax records for at least four years after the date the tax becomes due or is paid, whichever is later.
Basically, if you're an honest tax filer, keep your records for four years. If dishonest, keep them forever. To be on the safe side, I'm keeping it all for seven years, and destroying older documents.
Employment tax records -- such as the wage and tax statement called a W-2 form, and other such tax forms -- should be kept for at least four years, according to the IRS. That's a relief. I've got some from the 1990s that can go, although it's an interesting trip down memory lane seeing how little money I earned back then.
For the self-employed or people who run a small business, the IRS is a little foggy about how long to keep documents that come with running a business, such as purchases, sales, payroll and other transactions. It only says they contain information needed for bookkeeping by the business, and doesn't give a date for how long they should be kept.
The kicker for how long to keep documents is that the IRS can scare you into keeping them indefinitely because the burden of proof for deductions and statements made on tax returns is on you. If you're audited or the IRS asks for clarification, you'll have to prove certain elements of expenses to deduct them.
While nothing is certain in an IRS audit, hopefully following its guidelines listed above and keeping documents for the time it recommends will keep you in the clear. No one wants to have too tidy of a filing cabinet if a letter from the IRS ever arrives in the mail.
Aaron Crowe is a freelance journalist in the San Francisco Bay Area who specializes in personal finance topics.