How Long Do You Need to Keep Documents After Filing Your Tax Return?

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With the April 15th tax return mere weeks away, you may have already filed this year’s tax return. In which case, you can breathe a well-deserved sigh of relief.

But with your filing complete, you likely have a pile of supporting tax documents. And while it’s common knowledge you need to hang on to this paperwork for a period of time, many people wonder for how long and whether all documents are of vital importance, if some can thrown out sooner than later.

The short answer is the basic rule of thumb states you should keep your tax records for three years. But there are several critical exceptions in which you might need to hold tax documentation past the three-year horizon.

Three-Year Statue of Limitations

The aforementioned “three-year rule of thumb” is down to the fact that, in most situations, the statute of limitations on an IRS audit is three years. But if you are audited, there’s a high probability that tax documentation dating back more than three years can help defend you in the event of an IRS review.

It’s also important to remember that the statute of limitations begins on the due date of your filing, not the actual date you file. On the other hand, if you file an extension, the start date is pushed back to the date of your extension filing.

Special Considerations For Certain Records

If you claim a deduction for worthless securities, the supporting records must be kept for seven years. For example, if you own stock in a publicly traded company that goes bankrupt and shutters operations, it negates the value of your stocks.

To report a worthless security, you must file IRS Form 8949, which clarifies the dates you purchased it and the amount you paid.

Also, as an employer, you must retain employment taxes for four years. Records you’re required to keep include:

  • Employee personal information – Names, addresses, telephone numbers, e-mail addresses, direct deposit information, emergency contact information, date of birth, occupation, Social Security numbers, and benefit plan enrollment information
  • Employment information – Offer letters, employment eligibility data, full-time or part-time status, background checks, references, receipts for employed handbooks, evaluations, and termination information
  • Timesheets – Covering regular hours, overtime, and hours worked per day, workweek, and pay period
  • Pay information – Pay Rate, workweek dates, total hours worked, payment terms (hourly, salary, or commissions), and the employee’s classification (exempt or nonexempt)
  • Tax documents – Federal, state, and local jurisdiction tax forms and copies of tax return
  • Deduction information – Benefit deductions, wage garnishment orders, union dues, and deferred compensation information
  • Paid and unpaid leave records – Paid time off (PTO), vacation time balances and associated payment amounts, and records for other forms of leave, for example, the Family Medical Leave Act (FMLA), and paid sick leave
  • Direct deposit information – Names of depositor financial institutions, account numbers, and routing numbers
  • Reimbursement forms – Expense reports for work travel, office supplies, and the like
  • Pay records – Payroll registers documenting pay period beginning and ending periods, payment dates, and payment types (regular pay, overtime pay, tip credit, bonuses, commission, paid leave time)

Property Related Tax Records

If you claim deductions on items you use for business, the statute of limitations on supporting documentation is still three years. But it’s three years from the date you sell the property. For example, if you sell a car used for business purposes over the past ten years, the statute of limitations runs out three years after the car’s sale date.

In a 1031 exchange, your basis for the new property you purchase is dependent on the basis of the old property. As such, you must keep the record for the old property until the statute of limitations runs out after reselling the replacement property.

Other Situations That Could Extend The Statute of Limitations on Tax Documents

If it’s discovered that you underreported your income by more than 25% for a given year, the statute of limitations extends to six years.

Additionally, if you fail to file a tax return or file a return is incorrect information, you could be subject to an indefinite audit.

Suggestions for Storing Tax Records

Paper copies of required tax documents are usually the most easily accessible. But such records can take up a lot of space. Paper documents are also vulnerable, and precautions must be taken to protect these items.

Alternatively, documents can be scanned and saved in the cloud or on a hard drive. And the IRS accepts digital documents.

Have More Questions About Maintaining Tax Records?

While the three-year statute of limitations rule of thumb seems straightforward, there are clearly nuances and several exceptions.

If you have any concerns about whether you need to hold on to tax documents, get in touch for a FREE consultation!

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