How Long to Keep Your Tax Records?

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How long should you keep your tax records? The answer may surprise you and there are pitfalls to be aware of.

The IRS provides general guidelines for common situations as follows:

General Rules

  1. Keep tax records for 3 years.
  2. Keep records for 6 years if you did not report income that you should report, and it is more than 25% of the gross income shown on your return.
  3. Keep records indefinitely if you did not file a return or if you file a fraudulent return.
  4. Keep employment tax records for 4 years after the date that the tax becomes due or is paid, whichever is later.

Pitfalls to be Aware of

  1. You may not realize that you didn’t report more than 25% of your income and then the IRS can go back 6 years. For example, you may not have reported the sale of an asset or income from selling items on the Internet (usually you will receive a Form 1099-K).
  2. Cost-basis information should be kept for 6 years until after you sell the property, such as a house. Items can include:
    1. Settlement document for the purchase
    1. Records to show capital improvements
  3. Cost-basis information is normally provided on your brokerage statement, but not always. Any documents showing cost-basis should be kept for 6 years until after you sell the investment
  4. Cost-basis for business asset purchases should be kept just as long

Since most records can easily be converted to electronic form, I recommend keeping your tax returns and tax information as long as possible. It is not uncommon for issues to arise every now and then, which require old tax returns or tax information. For example, if you dissolve your business with the state of New Jersey, then they may ask for corporate tax returns from 10 years prior. I have seen this before and if you do not have the records or returns, then it creates an unnecessary and costly battle.

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