Record Retention Guide
How Long To Keep Tax Records
You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out.
The period of limitations is the period of time in which you can amend your return to claim a credit or refund or the IRS can assess additional tax. Table 1 contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period beginning after the return was filed. Returns filed before the due date are treated as being filed on the due date.
Table 1. Period of Limitations
THEN the period is...
1.Owe additional tax and (2), (3), and (4) do not apply to you
2.Do not report income that you should and it is more than 25% of the gross income shown on your return
3.File a fraudulent return
4.Do not file a return
5. File a claim for credit or refund after you filed your return
The later of 3 years or 2 years after tax was paid.
6. File a claim for a loss from worthless securities
Property: Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure your basis for computing gain or loss when you sell or otherwise dispose of the property.
Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up. You must keep the records on the old property, as well as the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.
Keeping records for nontax purposes: When your records are no longer needed for tax purposes, do not discard them until you check to see if they should be kept longer for other purposes. Your insurance company or creditors may require you to keep certain records longer than the IRS does.
Why Keep Records?
There are many reasons to keep records. In addition to tax purposes, you may need to keep records for insurance purposes or for getting a loan. Good records will help you:
- Identify sources of income. You may receive money or property from a variety of sources. Your records can identify the sources of your income. You need this information to separate business from nonbusiness income and taxable from nontaxable income.
- Keep track of expenses. You may forget an expense unless you record it when it occurs. You can use your records to identify expenses for which you can claim a deduction. This will help you determine if you can itemize deductions on your tax return.
- Keep track of the basis of property. You need to keep records that show the basis of your property. This includes the original cost or other basis of the property and any improvements you made.
- Prepare tax returns. You need records to prepare your tax return. Good records help you to file quickly and accurately.
- Support items reported on tax returns. You must keep records in case the IRS has a question about an item on your return. If the IRS examines your tax return, you may be asked to explain the items reported. Good records will help you explain any item and arrive at the correct tax with a minimum of effort. If you do not have records, you may have to spend time getting statements and receipts from various sources. If you cannot produce the correct documents, you may have to pay additional tax and be subject to penalties.
Kinds of Records To Keep
Basic records are documents that everybody should keep. These are the records that prove your income and expenses. If you own a home or investments, your basic records should contain documents related to those items.
Table 2. Proof of Income and Expense
FOR items concerning your...
KEEP as basic records...
- Form(s) W-2
- Form(s) 1099
- Bank statements
- Brokerage statements
- Form(s) K-1
- Sales slips
- Canceled checks or other proof of payment
- Written communications from qualified charities
- Closing statements
- Purchase and sales invoices
- Proof of payment
- Insurance records
- Receipts for improvement costs
- Brokerage statements
- Mutual fund statements
- Form(s) 1099
- Form(s) 2439