Although the April tax-filing deadline has come and gone, it’s a question many clients ask throughout the year. Depending on which person you ask, you might get a range of responses, from a few years to a lifetime. I strongly recommend you keep your tax returns forever. For example:
You bought a stock in 1992. You sell it in 2018. You claim a capital loss on your shares of stock. The IRS examines your return and alleges that you didn’t have a loss; rather you made a large profit. Wouldn’t you like to have proof of your purchase price? Another scenario:
You purchase a boat in 2002 for $50,000. You retire in 2018; your taxable income is now quite low. In 2018, a boater rams and destroys your boat. Unfortunately, you only receive $25,000 from your insurance company. You claim a casualty loss on the damage to your boat for the additional $25,000. The IRS denies the loss in an audit. If you don’t have records showing the purchase price of the boat, the IRS will likely win in Tax Court.
Another opinion: the Internal Revenue Service (IRS) recommends that you keep your tax records for a minimum of three years. Here are some guidelines:
The IRS generally has three years from the date you file your tax return to start an audit. You should retain all the W-2 forms, the 1099 forms, and other receipts to document income reported and deductions claimed. For example: You will need to keep your 2014 tax return and related papers until April 18, 2017, after which it is generally safe to shred and discard them, with the exception of the scenarios described below:
Scenario 1: For investment transactions, such as stocks, you need to be able to prove your original basis (cost) in the year you sell it. This means keeping purchase confirmations, notices of splits and dividend reinvestments, until you sell the security and then for three years after that.
Scenario 2: For real-estate transactions, including your home, you need to be able to substantiate your original cost (i.e., closing statements) and any improvements made during your ownership. Once you sell the real estate, the three-year rule applies.
The IRS can start an audit within six years if gross income is understated by more than 25 percent. Also, if a taxpayer failed to file a return or has filed a false and fraudulent return, there is no time limit on how far back the IRS can go. There is no statue of limitations in this case.
Ultimately, the length of time you should hold on to tax records depends on the individual.
If you decide to get rid of tax documents, make sure to shred them. Tax returns contain sensitive information that identity thieves love. If you discarded or lost a tax return and later need a copy, don’t worry. Copies of tax returns, all attachments and W-2 forms are generally available for the last seven years from the IRS and can be obtained by filing Form 4506, Request for Copy of Tax Form. You’ll also be charged a nominal fee for each return requested.
If you are very conservative and want to keep all tax records, the space required to store tax returns and supported documents is minimal. If you are very cautious, you can keep hard copies of tax documents in a fire-proof safe. Also, you can scan your papers and keep a backup copy of the files on a cloud service.
For further information, consult IRS Publication 552, Recordkeeping for Individuals.
Barry Lisak is an IRS Enrolled Agent, meaning that he has passed special U.S. Treasury Department exams that qualify him to represent clients dealing with audits or tax-resolution cases. Any questions can be directed to him at (516) TAX-SAVE, or firstname.lastname@example.org.