Tax season is stressful enough just getting those returns finished and sent in time. Now you have to deal with storing all those tax records. Or do you?
The good news is you don’t have to be a hoarder. But before you start force feeding that shredder, there are some tax documents you should hold on to for a little while.
If you’re like me, you may be holding on to tax records out of fear the IRS will show up for an audit or maybe it’s just a keepsake of incomes past.
The hard part is deciding what records should be kept, what is junk, and how long it all needs to take up space. The IRS, of course, has all the record keeping specifics you’ll ever need.
Why Keep Tax Records?
Dealing with a potential audit is just one reason to keep those tax records. Your tax returns and investment statements may still come in handy for other reasons.
It’s a good idea to hold on to returns just to show your past income history for loan or insurance applications.
You’ll want to keep those old brokerage statements if you don’t sell investments often or ever. When you finally decide to sell that fund you bought back in ’97, knowing the original cost basis (the number of shares, share price, and transaction fee) will make proving and reporting capital gains much easier. And don’t forget records of reinvested dividends along the way.
The same goes for any property purchases i.e. your home, vacation home, and rental property too.
What Records To Keep
The basic rule of thumb for tax documents - hang on to records that help prove income, expenses, property/investment values, used to prepare tax returns, or can support claims on your returns. Everything else is excess. So, hold on to:
- Income Records - W-2s, 1099s, K-1s, Bank Statements, Brokerage Statements
- Expense Records - Invoices, Receipts, Sales Slips, Cancelled Checks/Credit Card Payments
- Property Records - Closing Statement, Insurance Records, Invoices, Proof of Payment or Sale
- Investment Records - Brokerage Statements, Mutual Fund Statements, 1099s, Form 2439s
When saving bank, brokerage, and mutual fund statements, there’s no need to save every monthly statement if the year-end statement has all the information.
How Long To Hold Them
Tax records do have a time limit or the IRS has a time limit, depending on how you look at it, which usually falls under a three-year or six-year window of limitations. You may want to keep some tax records beyond six years like investment documents.
From an audit perspective, the IRS has a three-year review period. There are exceptions, if the IRS believes you underreported income by 25% or more, it has six years to come calling with an audit. The IRS has seven years when dealing with false investment reporting.
So worst case scenario, keep tax records for at least seven years after you file that return. Unless you didn’t file a return or file a fraudulent return. In which case, the IRS has all the time in the world.
Digitize Those Tax Records
You don’t need paper copies if you have digital ones and the technology today makes keeping those tax records that much easier. Online tax software gives you a copy of your tax return in electronic (.PDF) form. TurboTax even stores your old returns on its servers.
The same can be done to all those other documents too. A good scanner is all you need. Then take advantage of online storage. Services like Google Drive and Dropbox offer enough free space to store a lifetime of tax records. Do this and you’ll never have to worry about keeping all those paper copies again.