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How Long Should You Hold On To Old Tax Records?

by
Gordon W. McNamee
on
7/4/2018
How Long Should You Hold On To Old Tax Records?

Our society is increasingly turning towards becoming paperless, and many people are making real efforts at reducing clutter and simplifying their lives. As more and more records become available online and more and more documents are being stored in the cloud, people are starting to question the piles of papers that they have stored on closet shelves and tucked into manila folders and envelopes stuffed into drawers. If you’re in the midst of a cleanup, you’re probably wondering whether it’s okay to ditch your old tax returns and their documenting statements. The answer is that it depends upon your circumstances.

The general consensus is that everybody should keep their tax documentation for a minimum of three years after the return was due. That means both the tax return and all of its backup information. For those who took an extension, that three years is based on the date that you filed, not the original date that it was due, and that rule applies specifically to federal tax returns. In many states, you need to add a year to the timeframe for holding onto documents. Though this may seem like an unnecessary complication, states have indicated that they need the extra year because it can take time for the IRS to release information to them from the federal audit results that they depend upon to assess the liabilities that taxpayers owe to them.

The three-year federal rule, and the additional year required by some states, are both based upon everything having been done and filed absolutely correctly, and if that’s the case you are probably safe in getting rid of records after that amount of time has passed. When there are anomalies involved in your filing, it will change the amount of time that you need to hold records in the following ways:

  • If you’ve filed your return and left out more than 25% of your gross income, the amount of time you need to hold onto your records doubles to six years.
  • If you’ve failed to file a return, filed a false or fraudulent return to avoid having to pay the taxes you owe or taken any other action to avoid paying taxes, there is no limit to how long the IRS needs to assess taxes and how long you need to retain records.
  • If you file your tax return without signing it, the IRS can take as long as it needs to determine your liability, and therefore you need to retain records indefinitely.

Examples: Grant filed his 2015 tax return before the due date in April 2016. He will be able to get rid of the supporting documents on or after April of 2019, though it might be a good idea for him to hold onto them for another year if his state’s statute of limitations goes beyond the federal three-year rule. Michael was late in filing his 2015 return, and did not get all of his paperwork in until October of 2016. He will need to retain his documentation until October of 2019, or October 2020 if his state rules require the additional time.

No matter how badly you want to get rid of the extra clutter and papers, it is important that you retain copies of both your tax returns and W-2 issued by your employer. Unlike the backup information used to fill out your returns, the returns themselves can end up providing valuable information for a variety of applications, including documenting transactions and social security benefits for figuring out certain information for future tax returns. The most common reasons for needing old tax returns include:

  • Proving your identity – This is particularly important when you decide to use tax-filing software, as many programs require specific information from previous tax returns.
  • Proving income –When you’re applying for a loan, potential lenders may request proof of previous years’ income as reported on past tax returns.

If you haven’t kept your tax returns, you can either request a tax transcript from the IRS or copies of actual returns. Transcripts are summaries that include Adjusted Gross Income, and are available at no charge for both the most recent tax year filed and the previous 6 years of tax returns. Be aware that though this service has the advantage of being free, the transcripts are not immediately available. It takes several days for online and phone orders to be fulfilled, and if you request a transcript via mail it can take 30 days. Taxpayers requesting full tax returns should expect it to take 75 days for their request to be fulfilled.

To request a transcript:

  • Call 800-908-9946
  • Log on to IRS.gov and go to Get Transcript Online. You can view transcripts or print out a copy after authenticating your identity.
  • If you are unable to authenticate your identity or would prefer a copy by mail, you can click on Get Transcript by Mail to order a copy to be sent to your home. You can also send in Form 4506-T or Form 4506T-EZ to the IRS to receive a transcript by mail.

If a transcript will not suffice, you are able to get a copy of your full tax return going back six years for $50 per copy by completing and mailing in Form 4506. The form should be mailed to the office indicated on the form.

There are some very good reasons for holding onto some of the documenting information, no matter how tempting it is to throw it away. These reasons include:

  • Stock and mutual fund statements that include information about dividend reinvestment – Reinvested dividends have a direct impact on basis price, and without these statements it is very difficult to recover this information. You should hold onto this information for a minimum of four years after you’ve disposed of the stocks.
  • Stock purchase and sales information – It’s a good idea to hold onto all records having to do with stock acquisitions or sales for a minimum of four years after you’ve gotten rid of the stock, particularly purchase records and sales records that show profit or loss.
  • Receipts having to do with purchase or improvements on tangible property- Whether the records involve your home, a rental or investment property or a business property, you need to hold onto documentation of any capital improvements for at least four years after you sell the property.

If the idea of throwing out records has you concerned and you’d like confirmation of what you should keep or discard, contact your tax professional.

Gordon W. McNamee, CPA writes for TaxBuzz, a tax news and advice website. Reach him and his team at [email protected].

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

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