You’re done with the taxes for another year. Time to dump the all the receipts and paperwork associated with preparing the return, you think. Not so fast. You might need some of that documentation if you get audited; without it, tax benefits that you claimed could be disallowed.
The IRS generally has three years after you file your federal return in to commence an examination of that return. The major exceptions are cases where a large portion of income is omitted (a six-year limit can apply then) and cases of willful failure to file returns or purposefully fraudulent returns (where no time limit applies).
Here’s what I recommend for record retention for income tax purposes. What you keep to satisfy loan agreements, for employment in certain industries or government, or for other specialized purposes may be more involved.
- Six to seven years – Tax returns and backup documentation for both income and deductions. Pay special attention to mutual fund and brokerage year-end statements which are often revised. Keep cancelled checks and receipts or acknowledgements to support deductions.
- One year – Monthly bank records, brokerage statements, pay stubs and other financial data summarized at year-end by a Form W-2, 1099 or other official tax reporting form. Verify that your monthly activity agrees with amounts on those forms.
- Indefinitely – until at least three years after disposing of a particular property – Employer retirement plan documents (even if you no longer work for the company, as long as you are entitled to benefits); IRA contribution records for any accounts that include “after-tax” amounts; purchase records for stocks, mutual funds or any other securities; documentation of the purchase price and major improvements for your home and any other real estate; and similar documentation for big ticket items such as jewelry, antiques or collectibles. Keeping these records also helps to prove value in the event of loss or damage), both for tax and insurance purposes.
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