What to Keep and for How Long
Tax records should be maintained on a year-round basis, not hastily assembled just prior to your annual tax appointment. Without tax records, you can lose valuable deductions by forgetting them on your tax return, or, if you are audited, you may find that you have unsubstantiated items disallowed.
Generally, returns can be audited for up to three years after filing. However, the IRS may audit for up to six years if there is substantial unreported income. The three- and six-year limits begin with the filing of a tax return; if no return is filed, the time limit never starts to run.
Which records are important?
Following are some of the more common ones:
- Records of income received
- Expense items, especially work-related
- Home improvements, sales, and refinances (for homes with profit potential of $250,000 or more)
- Investment purchases and sales information
- The documents for inherited property
- Medical expenses
- Charitable contributions (records vary with value of gift)
- Interest and taxes paid
- Records on nondeductible IRA contributions
- Annual statements for investment account
How long you should retain records is partly a matter of judgment and a combination of state and federal statutes of limitations. As mentioned earlier, federal tax returns can be audited for up to three years after filing (six years if under-reported income is involved). Thus, it is prudent to keep most records for six years after the return filing date.
Some records are worth retaining permanently, partly due to long-term needs. Consider permanently retaining a copy of each year's tax return. Contracts, real estate buy/sell records, and records of property improvements should be retained for seven years after the property is sold.
If you are in business, your record requirements will be more extensive. Please call us and we’ll be delighted to help you develop an effective system of record retention.