I regularly remind clients to hold onto their tax records in case their returns are questioned by the Internal Revenue Service. Understandably, clients ask just how long they need to save those old records that clutter their closets and desk drawers.
Unfortunately, there’s no flat cutoff. The IRS says the answer depends on what information the records contain and the kind of transaction involved.
It supplements this vague guideline with a cryptic warning: Keep supporting records for “as long as they are important for the federal tax law.” Translated from government argot, this means: Save credit card and other receipts; bills; invoices; mileage logs; canceled, imaged or substitute checks; and whatever else might help support income, deductions, exemptions, credits, exclusions, deferrals and other items on your return.
You should hang onto these documents at least until the expiration of the statute of limitations for an audit or for you to file a refund claim, should you find an error after filing. The statute of limitations is a limited period of time, after which the tax gatherers are no longer able to come knocking and after which you can’t recover an overpayment.
In most cases, the IRS has only three years from the filing deadline to take a crack at your return. For example, the deadline is April 2020 for the government to start an examination of a return for tax year 2016 that was filed in April 2017. As soon as three years elapse, you could toss out or—if apprehensive—shred much of the paperwork that you’ve accumulated.
But wait! Predictably enough, nothing is straightforward when it comes to taxes. There are several exceptions to the three-year test, but the two most important don’t apply to most people.
The first one authorizes the IRS to double the audit deadline from three to six years if the amount of income you fail to report is more than 25% of the amount you show on your return. To illustrate, the six-year deadline expires in April 2020 for returns for tax year 2013 that were submitted in April 2014.
The second exception specifies that there’s no time limit should you fail to file a return or you file one that’s deemed false or fraudulent. The audit, admonishes the IRS, can begin “at any time.”
Those exceptions aside, there are other situations when it’s advisable to keep tax-related documents for much longer than three years. For example, you need to retain records of home improvements, as well as payments for stocks, mutual funds, real estate and other investments. These records are vital, not only because you may need them for an IRS audit, but because you need them to figure your profits or losses on sales that may not take place until many years later.
You also should retain indefinitely copies of 1040 forms filed electronically or mailed in. Copies are always helpful as guides for future returns or amending previously filed returns, and may prove helpful if the IRS claims you failed to file them.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.