How long to keep tax documents | DiMercurio Advisors

I guess we’ll find out.

In the era of Marie Kondo and Swedish minimalism, everyone is thinking about decluttering. Getting rid of old electronics, books, and clothes you haven’t used in years is a great feeling and can make a big difference in stress levels. But what about all those old papers you’ve been holding onto?

You may not need that graded essay from your junior year, but don’t go tossing out every old document just yet. Depending on the particulars of your tax situation, you might want to keep some in case the IRS comes knocking with a list of questions.

How long do you really need to keep tax documents, anyway?

The basics

• In case the IRS has questions in the future, you should hang onto your tax documents for a while
• Different types of documents have different “periods of limitations” but in general, keep tax returns forever and supporting documents for eight years after filing
• Use tools like digital backups to make the job easier

Why keep tax documents at all?

Sometimes the IRS conducts audits, they can be difficult to predict, and it’s better to be prepared. If you do get audited, documents that corroborate what you’ve been putting on your tax returns will be crucial evidence in your favor.

If your tax return is fairly standard, without too many extra deductions or credits, you may not need to keep too many documents around. The more complicated your financial situation, the more you’ll probably want adequately documented. However, it’s a good idea for all taxpayers to retain basic documentation, even if your tax returns have always been simple.

What documents are we talking about?

Of course, you should be keeping copies of your returns, but that’s just the starting point. You need to keep any supporting documentation that proves your tax returns are truthful and accurate. Anything you give to your CPA or use to prepare your tax return should be kept.

• For individuals with jobs, that means pay stubs, any W-2s or 1099s that document your income, and any other major IRS forms (the ones with four numbers in the name).
• Businesses should be keeping copies of the general ledger and other financial statements, plus client invoices, receipts, and anything else that documents business-related expenses.

These are only a few basics, and depending on the particulars of your situation, you might need additional supporting evidence beyond all this. Just think about what your tax returns typically say, and make sure you have the papers to back them up. And, of course, consult with your CPA and keep whatever documents they recommend.

What does the IRS say?

The IRS’s general advice is that records ought to be kept for three to six years from the date the tax return was filed (or the extended due date if you received an extension). This suggestion is based on the rules around how far back the IRS is allowed to audit you.

Statute of limitations that apply to tax returns

You probably don’t need to memorize each individual rule, but here’s a few examples of the IRS’s official guidelines.

• 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 (yes, they really say that on their website).
• Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Here’s what we think

You should keep your physical tax returns forever, as they serve as crucial historical records. Additionally, anything that verifies what goes onto those tax returns should be kept for at least eight years — one year past the IRS's longest statutes of limitations.

Working with a CPA can help, as a good CPAs will usually keep tax returns and supporting documentation for a decade (and will usually even keep them for several years after you stop working with them). They’re definitely not required to, though, so you shouldn’t be putting it all on them to keep that information around.

It’s also a good idea to think about how you’re storing these documents. For receipts and similar items, consider using digital tools like Receipt Bank or Hubdoc (free with Xero, by the way) to capture and store them. For other documents, digital storage solutions like Google Drive or OneDrive work well. Even taking pictures of your documents with your phone and storing them on the cloud is better than no digital storage at all. And, of course, don’t forget to back up your data on a regular basis.

If you use digital tools and online services to store your supporting documentation, be aware that you only have guaranteed access as long as your account is active and your provider stays in business. Make sure you understand the provider's policies and responsibilities regarding data retention. If you decide to cancel a service, make sure you have copies of everything you may need before jumping ship.

What about state taxes?

Remember, states have their own tax requirements, independent of the IRS! Most states do, however, follow the IRS’s guidelines when it comes to these statutes of limitations. Keep all state tax returns forever and keep any supporting documents for at least eight years.

You should also check the rules for your home state, as well as any states in which you do business. They may have unexpected requirements and you don’t want to be caught off guard. Consider asking a CPA as well.

Other tips

Here are a few additional tips to keep in mind:

• Keep long-term documents (seven years or more) in a separate place from temporary ones.
• Consider holding onto documents for a longer period if the IRS is experiencing delays or if there are ongoing issues with your tax situation. Never toss documents during an IRS audit.
• Filing tax returns, even when there is no activity or income, is definitely the move. The IRS generally has seven years, max, after a return is filed to investigate it, so you should start that countdown as soon as you can.
• Always follow the strictest version of the rules that you might be subject to.

The bottom line

When it comes to the IRS, a “better safe than sorry” approach is always recommended. Most people never get audited, but plenty of people do. If that time ever comes, adequate documentation is your best friend.

Keep your tax returns forever, keep any supporting documents for at least eight years after filing, and use digital backups. Just a few basic steps can do wonders for your peace of mind.

For maximum peace of mind, give DiMercurio Advisors a call and ask how our tax team can give you the easiest filing experience you’ve ever had.