Tax Records – What Tax Documents You Should Keep And For How Long

Many taxpayers get confused or are unsure about how long one should keep tax records. The term "tax records" is referred as your tax returns and the documents that support the information in the returns. These tax documents could contain receipts, bank statements, 1099s, et cetera. If you happen to be one of the unlucky few to be audited, these records will be crucial to fending off the IRS.

Tax Returns 

If you want to protect yourself from a nasty audit, you should keep all of your tax returns indefinitely.  The IRS has been known to lose or misplace tax returns.  Although conspiracy advocates would argue that this is evidence of a nefarious scheme, the simple fact is that the IRS receives millions of returns over a 3 month period and lost returns are unavoidable.  So how can you protect yourself in case of an audit?  You can protect yourself by keeping copies of every single tax return. 

One quick word about the IRS e-file program.  If you file your returns electronically, make sure you obtain copies from the company that filed your return.  All such entities are required by law to provide you with paper copies. 

Records Supporting Tax Returns 

You may want to keep supporting tax records for a period of six years from the date your returns were filed.  Generally the IRS only has three years to audit you from the filing date.  For instance, if you filed your 2011 tax return on April 15, 2012, the IRS would have to start an audit by April 15, 2015.  Bear in mind that if you filed an extension, the IRS will have 3 years from the date you submitted the return.  As is always case with taxes, there are exceptions to this general time period. 

If your tax return looks like the great American novel, the running of the 3 year audit period might not save you.  Failure to report more than 25% of your gross income will give the IRS an additional three years to pursue you.  By using the previous example, the IRS would have until April 15, 2018 to audit your 2011 tax return. 

Property Records – File Them In A Filing Cabinet 

You might need to get a filing cabinet if you hold property for an extended period of time.  For example, let’s say that you purchased a home in 1990 for $150,000 and made $50,000 in improvements over the years.  You have to keep the purchase records, mortgage statements and receipts that relate to the home improvements.  When you sell the home, you will need the records to determine the tax consequences of the sale, to wit, your basis (original cost plus improvements) and profit.  If the IRS makes a decision to take a closer look at the reported profit, you will have to show your tax records in order to support your claims.  When you end up selling the property, it is suggested that you keep all of the tax records for an extra six years. 

Divorce Records 

Make sure you keep copies of all of your financial documents, tax returns as well as supporting documents if you get divorced.  You may want to also keep copies of all divorce agreements and court orders which cover property and financial issues.  When couples get divorced, the tax and credit results could get nightmarish.  If you don't keep records, you will have to ask your ex-spouse for them.  Get the records now to prevent doubling your misery! 

Hopefully, you will never experience having to show your tax records to the IRS.  If you happen to be one of the unlucky ones that gets audited, your tax records should keep your feet out of the fire.