“So how long should I keep my tax returns, anyway?”
According to our president, Phyllis, this is one of the most common questions she’s asked. I’m guilty of asking her myself. It’s a valid question. I’ve heard everything from two years to ten years, with the most common response being seven. But what’s the actual answer?
Three years. (Insert * here in your mind, because of course it’s not that simple.)
According to TurboTax expert Lisa Greene-Lewis, CPA, three years will be sufficient for the average filer. In her words, “… according to the IRS statue of limitations, three years is the time you have to claim any tax refund owed to you, and it is the time that the IRS will generally go back if they need more information and substantiation of what you claimed on your taxes.”
Meaning that generally speaking, three years is the timeframe in which you can file an amended return or seek a refund. It’s also the length of time that it usually takes the IRS has to question your return and bill you for any additional missing taxes. This, of course, assumes you’re a standard employee with a W-2 and relatively uncomplicated taxes, or a self-employed or freelance worker who isn’t claiming the sale of some of your business equipment.
Naturally, there are exceptions, and your state might have different recommendations. While Pennsylvania agrees with three, New Jersey recommends seven, California and Arizona require four, and Montana suggests five.
Then we must look at some less common but not-impossible scenarios. If you omitted more than 25% of your gross income from your federal return, hold onto those forms for six years. If you withdrew money from a retirement account, keep the forms for seven years. If you claimed a loss from worthless securities or from a bad debt deduction, keep the records for seven years. And if you filed a fraudulent return… Hold onto your forms forever, because that statute of limitations doesn’t expire.
Here are some of the records and returns you should keep for a longer period of time:
- Real estate records – for three years after you dispose of the real estate
- Securities transactions – until three years after you sell the assets
- IRAs, 401(k)s, and any retirement plans – for three years after the accounts are depleted
- Inheritance – for three years after you sell the asset
- Payroll information – businesses should hold onto payroll information for four years
When the time passes, don’t just toss them. First, check that you don’t need to keep them for other purposes—insurance companies and creditors (such as a mortgage holder) might require you to keep them longer. Should you be able to dispose of them, then we have one word for you: Shredder.
Further information can be found here: How long should I keep records? | Internal Revenue Service (irs.gov) And of course, when it doubt consult with your accountant.