I strive to be a minimalist.
Clutter, whether it’s physical possessions (stuff), electronic clutter (emails, files, RSS, etc.), or old fashion paperwork can cloud my mind and really weigh heavily on me. That’s why a recent reader inquiry from “Stacey C” really resonated with me,
“I have been piling up tax returns for the last 7 years or so and don’t really feel comfortable leaving them around. But, I’m worried about getting rid of them for audit purposes. Does the IRS give a recommendation on how long to keep tax records and what is your opinion on how long you should keep tax records?”
Great question, Stacey.
The IRS does have a recommendation on how long to keep tax records. In it, they refer to the “period of limitations”, which is similar to the “statute of limitations” that many people are familiar with. It’s basically the period of time in which an action or claim (i.e. an audit) can be made against you. It’s also relevant if you need to amend a return, as the period of limitations also applies to that.
In general, the IRS has 3 years after a return was filed to initiate an audit. There are, however, a number of exceptions to this rule. I’ll break out those exceptions in the following table:
|If you:||Then keep tax records for:|
|File a return and the following situations below do not apply to you.||3 years|
|File a claim for a loss from worthless securities or bad debt deduction.||7 years|
|Do not report income that you should report, and it is more than 25% of the gross income shown on your return.||6 years|
|File a fraudulent return.||No limit|
|Do not file a return.||No limit|
|File a claim for credit or refund after you filed your return.||Later of 3 years or 2 years after tax was paid
It’s also worth noting that this doesn’t just mean your tax return – it means all of the supporting tax documentation that goes along with it. This includes, but is not limited to:
- Income forms: W-2’s, 1099’s, K-1’s, etc.
- Investment records: 1099’s, etc.
- Property taxes and mortgage interest
- Affordable Care Act documentation: 1095’s, 8965
- Expense records (check out the new IRS sharing economy tax guide for help in this area)
- Donation receipts
- Retirement account documentation: 1099-R, 5498, 8606, etc.
The Statute of Limitations can Differ by State Too!
To make matters even more complicated, a number of states have a statute of limitations that differs from the IRS 3-year rule for raising an audit:
- Arizona, California, Colorado, Kentucky, Michigan, Ohio, and Wisconsin: 4 years from the date you file your return or the date it is due, whichever is later, to assess additional obligations.
- Kansas: 3 years after the latest of: 1) the date the original return is filed; 2) the date the original return is due; or 3) the date the tax due on the return is paid. Taxes can also be assessed up to 1 year after an amended return is filed, if filed later than the dates above.
- Louisiana and New Mexico: 3 years from December 31 of the year your taxes are due.
- Minnesota: 3.5 years from the filing date or the due date, whichever is later.
- Montana: 5 years from the filing date or the due date, whichever is later.
- Oregon: 3 years from the filing date.
- Tennessee: 3 years from the filing date or the due date, whichever is later, unless you claim a refund (in which case it’s 3.5 years) or the IRS changes your federal return (in which case it’s 5 years).
My Opinion on How Long to Keep Tax Records
I tend to err on the side of caution when it comes to tax matters. There is no limitation on how long the IRS or any state can initiate an audit if they believe you have filed a fraudulent return (or didn’t file one at all). With that being the case, then the 3-year period of limitations is essentially meaningless, right? And if you got rid of your 7-year old tax return 4 years ago, it’s probably somewhere in the digestive cavity of a worm by now – and you’ve got no documentation to support yourself in an audit.
Sure, it may be unlikely the IRS or a state will raise an audit after the typical period of limitations is up, however, it could still happen.
So, my recommendation would be that you should keep your tax documentation indefinitely. You can do this by keeping digital records of everything (plus paper records for the standard 3 years, just in case original documentation is requested). The best way to do this would be to simply have a tax folder in cloud storage (Google Drive is free) for each year, and scan (or download from online accounts) and upload all documentation to that year’s folder. This simultaneously serves 4 purposes for you:
- It gives you the ability to shred all paper documentation after 3 years, without worry of having no documentation if you do get audited.
- It eliminates clutter, if you are cautious like me.
- It allows you to later cross-check your income history with Social Security statements online (to make sure their recorded income at SSA.gov matches your actual income and you don’t get short-changed on future payments). Besides, seeing your income history over time is pretty cool anyways.
- If it’s in the cloud, it can’t be destroyed by fire, flood, or other natural disaster. And, it’s less likely to be taken by theft.
Readers: how long do you keep your tax documentation?