How Long Should I Retain Tax Records?

We are often asked for guidance on how long clients should retain personal income tax records. You may have to produce those records if IRS (or a state or local taxing authority) audits your return or seeks to assess or collect a tax. In addition, lenders, co-op boards, or other private parties may require that you produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you.

Keep returns indefinitely and the supporting records usually for six years

In general, except in cases of fraud or substantial understatements of income, the IRS can only assess tax for a year within three years after the return for that year was filed (or, if later, three years after the return was due). For example, if you filed your 2018 individual income tax return by its original due date of Apr. 15, 2019, IRS will have until Apr. 15, 2022, to assess a tax deficiency against you. If you file your return late, IRS generally will have three years from the date you filed the return to assess a deficiency. The assessment period is extended to six years if more than 25% of gross income is omitted from a return. In addition, where no return was filed for a tax year, IRS can assess tax at any time (even beyond three or six years). If IRS claims that you never filed a return for a particular year, keeping a copy of the return will help you to prove that you did. While it’s impossible to be completely sure that IRS won’t at some point seek to assess tax, retaining tax returns indefinitely and important records for six years after the return is filed should, as a practical matter, be adequate.

Records relating to property should be kept longer

The tax consequences of a transaction that occurs this year, such as a sale of property, may depend on events that happened years ago. The period for which you should retain records must be measured from the year in which the tax consequences actually occur.

For example, if you bought your home in 2006 for $200,000, made $20,000 of capital improvements in 2013, and sell it this year. To determine the tax consequences of the sale, you must know your basis in the home—your original cost plus later capital improvements. If your return for the year of sale is audited, you may have to produce records relating to the purchase in 2006 and the capital improvement in 2013 to prove what your basis is. Therefore, those records should be kept until at least six years after you file your return for the year of sale.

You should retain all records relating to home purchases and improvements even if you expect your gain to be covered by the home-sale exclusion, which can be as much as $500,000 for joint return filers as of the time of this writing. You will still need to prove the amount of your basis if asked.

Similar considerations apply to other property that is likely to be bought and sold—for example, stock in a business corporation or in a mutual fund, bonds (or other debt securities), etc. In particular, remember that if you reinvest dividends to buy additional shares of stock, each reinvestment is a separate stock purchase. The records of each reinvestment should be kept for at least six years after the return is filed for the year in which the stock is sold.

In case of separation or divorce

If separation or divorce becomes a possibility, be sure you have access to any tax records affecting you that are kept by your spouse. Copies of all joint returns filed and supporting records are important, since both spouses are liable for tax on a joint return, and a deficiency may be asserted against either spouse.

Your records should include a copy of the divorce decree or agreement of separate maintenance, which may be needed to substantiate alimony payments (which, for pre-2019 divorces, are deductible by the payor spouse and included in the payee’s income) and distinguish them from child support or a property settlement. Your records should also include agreements or decrees over custody of children and any agreements about who is entitled to claim them as dependents.

Retain records of the cost of all jointly-owned property. Also, get records as to the cost or other basis of all property your spouse or former spouse transferred to you during your marriage or as a result of the divorce, because your basis in that property is the same as your spouse’s or former spouse’s basis in it was.

Electronic record storage

You may keep your tax records in electronic form instead of or in addition to keeping paper copies. The periods for which the records should be kept are the same as for paper records. If your tax records are stored on your computer’s hard drive, you should back it up to an external storage device or on paper.

Loss or destruction of records

To safeguard your records against loss from theft, fire, or other disaster, you should consider keeping your most important records in a safe deposit box or other safe place outside your home. In addition, consider keeping copies of the most important records in a single, easily accessible location so that you can grab them if you have to leave your home in an emergency.

If you have any questions or wish to discuss this matter further, we specialize in accounting and tax services, please contact us.