Let’s face it, we’re living in a digital world now, and most anything you’re looking for can be found online, including a lot of records you would normally keep with your tax returns. I know there are some of you out there that have every piece of paper you’ve used to support filing your tax return since you started filing, but what are you required to keep, and how long do you need to keep it?
Generally, the IRS has three years from the date you file to audit your return. And you have three years to file an amended return to fix any errors you discover. With that in mind, it’s a good idea to keep your W-2’s, 1099’s, and other tax documents until at least the end of 2025. And you should be able to dispose of all tax records relating to your 2017 return since three years passed at the end of 2021.
You might want to keep your records for longer than three years just to be safe. In circumstances where the IRS finds that you’ve underreported your income by more than 25%, which can happen to self-employed workers or business owners because of overlooked records, the IRS can examine your return up to six years after filing. For this reason, many suggest keeping tax records for seven years.
There are several situations where you should keep your records for more than the required minimum time. For example, if you purchase a piece of investment property, or buy 100 shares of your favorite stock, you need to keep all records relating to the purchase and holding of that investment until you sell it, which could be much longer than seven years.
But what about paper vs. digital? And what if you don’t keep it, but you can access it online? While the IRS is not on the cutting edge of today’s technology, they are improving, and I have found they have no problem with receiving requested records digitally. If you want to scan and save your paper records in a secure online storage platform, that will be acceptable. You just need to make sure you don’t lose access to the storage site. Since the cost of online storage has decreased significantly over the past few years, it may not be a bad idea to keep your digital records in more than one place, just in case.
And if you do lose access to your digital files, in most cases you can retrieve everything you need from other sources. Your employer has a digital copy of your W-2. Your bank or broker has a digital copy of your 1099. Your bank can send you digital copies of your bank statements. The credit card company can send you electronic copies of your credit card statements. Also, if you pay a tax professional to prepare your tax return, they should have a copy of the tax documents as well. We have digital copies of tax returns, and the supporting documents, for all clients going back in many cases over 15 years.
Please don’t misinterpret what I’m saying. I’m not saying you don’t have to keep copies of your returns and tax documents because someone else will have them. You should have a good filing system and keep copies as required. But in most cases, you’re not required to keep records beyond three years. If you have a good system, and you delete or destroy records after the required holding period, you’re complying with the requirements. If you have records going back forty years, something you put on a 2021 return could bring up a question going back to 1995. If you still have those records, they can be used for, or against you. You can’t be penalized if you don’t have the records and you’re not required to have them.
Hopefully this gives you some guidance on the requirements for record-keeping but if you have specific questions, please email firstname.lastname@example.org for more information.