The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep records that support an item of income, deduction, or credit shown on your tax return until the period of limitations for that tax return runs out.
The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The guidelines below reflect the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
Note: Always keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
Period of Limitations for Income Tax Returns
Here’s a breakdown of the retention periods based on different scenarios:
- Keep records for 3 years if situations (4), (5), and (6) do not apply to you.
- Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
- Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
- Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
- Keep records indefinitely if you do not file a return.
- Keep records indefinitely if you file a fraudulent return.
- Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Examples of Typical Tax Returns and Documentation:
- Form 1040 (Individual Income Tax Return): Keep records supporting income, deductions, or credits (such as W-2s, 1099s, receipts, and mileage logs) for at least 3 years in most cases. If you file a claim for a bad debt deduction or worthless securities, hold on to records for 7 years.
- Form 1120-S (S Corporation Tax Return): Keep documents that support the corporation’s income, deductions, and credits for 3 years. If the return involved the sale of assets, keep records until the period of limitations for the year of disposal expires.
- Form 941 (Employer’s Quarterly Federal Tax Return): Employers must retain employment tax records (including payroll and tax deposits) for at least 4 years after the tax becomes due or is paid, whichever is later.
Property and Nontaxable Exchanges
If the records are connected to property, keep them until the period of limitations expires for the year in which you dispose of the property. This applies to records that are necessary to calculate depreciation, amortization, or depletion deductions, as well as determining the gain or loss when you sell or dispose of the property.
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, increased by any money you paid. It is essential to keep records of both the old property and the new property until the period of limitations for the year in which you dispose of the new property expires.
Nontax Purposes
When your records are no longer needed for tax purposes, don’t discard them without checking whether you need to retain them for nontax purposes. For example, your insurance company or creditors might require you to keep them longer than the IRS does.
Final Thoughts:
Understanding the periods of limitations for retaining tax records helps ensure you remain compliant with IRS rules. However, tax retention periods can vary based on your individual or business situation, so consult a tax professional if you’re unsure. Proper record-keeping is crucial for accurate tax filing and protecting yourself in case of an audit or legal issue.
If you need help with tax filing, employment tax returns, or ensuring your records are in order, our firm can provide guidance. Contact us today for more information.