How Long Should You Keep Old Tax Records?

Discover the general statute for saving tax records.
Learn why some states have a longer statute of limitations.
Discover other issues that extend the statute’s duration.
Find out if you should keep your actual return.
Learn how to order copies of previously filed returns.

This is a common question: How long must taxpayers keep copies of their income tax returns and supporting documents? And Fiducial has your answer. Generally, individuals should hold on to their income tax records for at least 3 years after the due date of the return to which those records apply. However, if you filed the original return later than the due date, including if the taxpayer received an extension, you have to substitute the actual filing date for the due date. A few other circumstances can require taxpayers to keep these records for longer than 3 years.

Why should you keep old tax records?

The statute of limitations in many states is 1 year longer than in the federal statute. This is because the IRS provides state tax authorities with federal audit results. The extra year gives the states adequate time to assess taxes based on any federal tax adjustments. In addition to the potential confusion caused by the state statutes, the federal 3-year rule has a number of exceptions that cloud the recordkeeping issue:

The assessment period is extended to 6 years if a taxpayer does not report more than 25% of their gross income on a tax return.
The IRS can assess additional taxes without regard to time limits if a taxpayer (a) doesn’t file a return, (b) files a false or fraudulent return to evade taxation, or (c) deliberately tries to evade tax in any other manner. In these two cases, tax records should be kept indefinitely.
The IRS has unlimited time to assess additional tax when a taxpayer files an unsigned return.

If none of these exceptions apply to you, then for federal purposes, you can probably discard most of your tax records that are more than 3 years old. However, you may need to add a year or more if you live in a state with a statute of longer duration.

Examples:

Susan filed her 2020 tax return before the due date of April 15, 2021. She will be able to safely dispose of most of her tax records after April 15, 2024. On the other hand, Don filed his 2020 return on June 1, 2021. He needs to keep his tax records at least until June 1, 2024. In both cases, the taxpayers should keep their records a year or more beyond those dates if their states have statutes of limitations that are longer than 3 years.

Important note: Although you can discard backup tax records, do not throw away copies of any filed returns or W-2s. Often, these returns provide data that can be used in future tax-return calculations. They may also prove the amounts of property transactions, Social Security benefits, and so on. You should also keep certain tax records for longer than 3 years.

Tax records you should keep for 3+ years

Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after selling the stock. You’ll need the purchase data to prove the amount of profit (or loss) that you had on the sale.
Statements for stocks and mutual funds with reinvested dividends. Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. These reinvested amounts add to the basis of the property and reduce the gain when it is eventually sold. Keep these statements for at least 4 years after the final sale.
Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions, as well as all related capital improvements, for at least 4 years after the underlying property is sold.
Claims for a loss from worthless securities or bad debt deduction. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
Sales that create loss carryovers. If you sell stock, mutual funds, or investment property at a loss, and your total capital loss for the sale year isn’t fully absorbed by capital gains plus $3,000, the excess loss may be carried forward to be used on the next year’s return and even beyond, depending on the amount of the loss. The IRS could require proof of the original loss if a carry forward year’s return is audited, even many years after the original loss year. So, not only should you keep the return copies to account for the use of the carryforward loss, but you should also retain the records to substantiate the original loss until the carryover amount is fully used up, and for at least 4 years after the last year for which a loss is deducted.

Tax return copies from prior years are also useful for the following:

Verifying Income. Lenders require copies of past tax returns on loan applications.
Validate Identity. Taxpayers who use tax-filing software products for the first time may need to provide their adjusted gross incomes from prior years’ tax returns to verify their identities.

The IRS Can Provide Copies of Prior-Year Returns

Taxpayers who have misplaced a copy of a prior year’s return can order a tax transcript from the IRS. This transcript summarizes the return information and includes AGI. This service is free and is available for the most current tax year once the IRS has processed the return. These transcripts are also available for the past 6 years’ returns. When ordering a transcript, always plan ahead, as online and phone orders typically take 5 to 10 days to fulfill. Mail orders of transcripts can take 30 days (75 days for full tax returns). There are three ways to order a transcript:

Online Using Get Transcript. Use Get Transcript Online on IRS.gov to view, print, or download a copy for any of the transcript types. Users must authenticate their identities using the Secure Access process. Taxpayers who are unable to register or who prefer not to use Get Transcript Online may use Get Transcript by Mail to order a tax return or account transcript.
By phone. The number is 800-908-9946.
By mail. Taxpayers can complete and send either Form 4506-T or Form 4506T-EZ to the IRS to receive a transcript by mail.

Those who need an actual copy of a tax return can get one for the current tax year and for as far back as 6 years. The fee is $30 per copy (the fee is subject to change, so verify it on the current form). Complete Form 4506 to request a copy of a tax return and mail that form to the appropriate IRS office (which is listed on the form).

How to Keep Tax Records

The law doesn't mandate a specific recordkeeping system for taxpayers. You're free to choose the method that suits you best, as long as it allows you to furnish the documents if requested by the IRS. Nowadays, for most taxpayers, the easiest and most accessible way is maintaining records in digital form. The only requirement from the IRS is that your electronic storage meets the same criteria as hard copies. This means you must maintain the electronic systems for the entirety of the possible assessment period under the relevant tax statutes of limitations.

Have questions?

Do you have questions about which tax records you should retain and which ones you can dispose of? Click here to Request a consultation with a Fiducial Advisor at our office locations.

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