How Long You Have to Keep Tax Documents

Once tax season is over, it’s tempting to contemplate pushing every document into a shredder and going on your way until next year. However, prematurely disposing of your tax documents can have financial consequences because the IRS can audit you up to three years later. Likewise, it’s possible for taxpayers to claim a refund they missed within the last three years. Generally, you should plan on keeping all tax documents for a minimum of three years in case you get audited. Here’s what to know.

If you’re looking for ways to lower your tax liability, a financial advisor can walk you through specific strategies to optimize your portfolio.

The recommended period for keeping federal tax documents varies depending on the type of document and your circumstances. As a general guideline, it’s best to keep federal tax documents for at least three years. The maximum time to keep tax documents is seven years, after which they won’t serve a purpose for filing or receiving a refund.

The three-year timeline comes from the IRS, which advises taxpayers to keep W-2s, 1099s, invoices, donation receipts, property-related documents and investment documents according to the federal statute of limitations.

This rule allows you to claim a refund you were supposed to receive within the last three tax years. If you miss a return, you can submit the relevant forms and paperwork within three years from the filing date to receive the return.

However, three exceptions can extend the three-year limit. First, the IRS has six years to audit a return to collect taxes on income you didn’t report or underestimated. This situation can impact taxpayers with fluctuating incomes, such as business owners, self-employed contractors and investors.

Let’s say you made quarterly tax payments in 2021 that didn’t end up reflecting your total income that year. The IRS can pursue unpaid taxes on this income for the next six years if you underreported your income by more than 25%. As a result, keeping your documents for that long is important.

Business owners have another set of documentation to keep: Employment tax records. If you have workers on the payroll, you should keep all related files and paperwork for four years after the tax is due or you paid it, whichever is later.

In addition, it’s essential to keep documentation for seven years if you claim a loss from worthless securities or a deduction from a bad debt. Doing so ensures your ability to support these claims during an audit.

Lastly, some situations necessitate keeping files forever. Specifically, if you don’t file a return for a particular year, have never filed taxes before, or experience an issue regarding tax fraud, you should keep your documents indefinitely because the statute of limitations doesn’t have an endpoint.

You may need to keep documents concerning state taxes for longer than federal taxes because regulations differ by region. For example, Michigan’s statute of limitations for income taxes is four years, while Montana has five years to contact taxpayers for additional information or to audit a return.

In addition, specific facets of tax filing (such as fraud and unreported income) can have longer statutes. Therefore, it’s crucial to review your state tax laws and keep relevant documents according to your local statute of limitations. Working with a tax attorney can also help ensure you comply with state tax laws.

Storing your tax documents ensures compliance with tax laws, provides a record of your financial history, and offers protection in case of audits or disputes with tax authorities. It’s a good practice to organize and retain these documents for the recommended periods to address any potential future needs. Here are seven common reasons to keep your tax documents:

1. Record of income: Tax documents, such as W-2s and 1099s, provide a record of your income. These are crucial for accurately reporting your earnings to the IRS and referring back to them in case of an audit.
2. Qualification for deductions and credits: Supporting documents, like receipts, financial statements and expense reports help verify deductions and credits claimed on your tax return. Keeping these records is essential in case of an audit.
3. Proof of filing: Retaining a copy of your filed tax return serves as proof that you complied with your tax obligations for a specific year. Because not filing has severe financial ramifications, retaining proof protects you from penalties and fines. 
4. Audit protection: The IRS may audit your tax return within a fixed timeframe (typically three years), and having the necessary documents on hand can help you substantiate your income and deductions.
5. Claiming refunds: If you later discover that you are eligible for a refund or credit, the original documents will be necessary to file an amended return. Your window for claiming refunds is three years at the federal level (state statutes for refunds vary). 
6. Documentation for loans and financial transactions: Lenders may require tax returns as part of the documentation for mortgage applications or other loans. Tax documents are helpful in these situations.
7. Estate and inheritance purposes: Tax documents may be needed for estate planning, inheritance, or other financial planning purposes.

When considering what tax records to keep, it’s worth hanging on to every document related to your tax situation. This way, you can substantiate every detail about each tax year within the statute of limitations from the federal and state governments. Here’s a rundown of nine tax records to keep:

• W-2s
• 1099s
• Payroll documents
• Invoices
• Deposit slips
• Paid bills (such as medical expenses and property taxes)
• All financial documents related to running your business
• Mileage logs
• Documentation for itemized deductions you plan to take

While disposing of clutter and freeing up space in the filing cabinet can be tempting, it’s crucial to wait until the statute of limitations passes before getting rid of tax documents. So, when the statute of limitations passes beyond the reach of state and federal auditing (as summarized above), you can say goodbye to old tax documents. It’s critical to shred these documents to avoid the risk of identity theft.

Remember, other institutions may want you to keep your old tax documents. For example, lenders and insurance companies may ask for tax returns and financial statements from more than three years ago. As a result, it’s best to consider what other purposes your older documents may serve before disposing of them.

Intact tax documents let you file your taxes accurately, apply for loans, and comply with audits. As a result, keeping them intact and legible is a top priority.

The ideal place to store your tax documents is a locked, fire-proof safe. This way, your documents are safe from theft and natural disasters. You can also store other personal documents there, such as your mortgage documentation, life insurance policies, estate planning documents and property deeds.

Additionally, you can make electronic backups by scanning these documents to a cloud-based storage system. Various companies offer first-class encryption and cloud security for your documents. Doing so lets you access your documents on the internet and simplify storage. Plus, you can file electronically with the IRS in many cases, eliminating the paper mess that usually accompanies tax season.

Understanding how long to keep tax documents is essential for maintaining compliance with tax laws and ensuring a record of your financial history. The recommended periods, range from three to seven years, and vary based on the type of document and the statute of limitations from the IRS and your state government.

• A financial advisor can help you maximize your refunds and ensure that you are in compliance with tax regulations. SmartAsset’s free tool doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Tax season comes, and the eternal question arises: Should you file taxes yourself or hire a tax pro? Evaluating your financial circumstances can help you save time, money and stress.

Photo credit: ©iStock/staticnak1983, ©iStock/Drs Producoes, ©iStock/tommaso79