Keeping tax returns and records are a necessity not just for IRS but also for other legal reasons. Let us first start with the reason related to tax compliance. Once you file your tax return, IRS may audit your return. IRC (Internal Revenue Code) empowers IRS to conduct audit of tax returns for up to six years if IRS has a reasonable basis to believe that your income was under-assessed at least by 25 % of declared income. Therefore, it is wise and lawful to preserve the documents based on which you prepared your tax return for at least six years.
Further Law requires that you hold on to some other records -like receipts, canceled checks, and another records-even longer.It is also a good idea to hold onto copies of the return itself indefinitely.As far as reasons other than tax compliance is concerned, you need to save your W-2 forms until you start receiving Social Security benefits so you can verify your income if there’s a problem.
Lastly note that that If you don’t itemize deductions on Schedule A, you might not need to hold onto as many documents.
Different Tax records ,Different Period ?
One year for pay statements and brokerage slips
The pay stubs ( W-2s) and monthly brokerage statements( 1099s.) must be tallied and kept up to at least one year.
Three Years for forms
Generally, you should hold W-2 forms,1099 forms, and 1098 forms if you deducted mortgage interest till three years from the due date of filing of the tax return. Further, the following documents must be kept for three years:
- If you spent out of withdrawals from health savings accounts and 529 college-savings plans, then record to prove eligible expense out of such withdrawals.
- Receipts for charitable contributions;
- Proof of contributions to a traditional IRA.
In case of sale of investments and property, you need to save some documents pertaining to property sale up to at least three years after you sell.
Six Years for Audit Reason
Since IRS can initiate an audit or assessment of your income for up to six years if IRS has reasonable proof that if you’ve neglected to report at least 25% of your income. Therefore, records of income, expense, and tax return should be kept at least six years.
Seven Years for claiming losses
Internal Revenue Code lets you to write off bad debts and bad investment in securities upto seven years . So, if you want to claim bad debt upto seven, you should keep related records and documents for at least seven years.
Ten Years for Foreign Tax Credits Claim
IRS allows credit or deduction for any tax paid outside the USA. You can amend your return to change your claim of foreign tax credit or as a deduction up to 10 years. Hence, you must save any records related to foreign taxes paid for at least 10 years.
How long to keep tax returns after death?
You should keep tax documents for at least three years after a person’s death or three years after the filing of an estate tax return, whichever is later. Non-tax documents like birth certificates, death certificates, marriage certificates and divorce decrees should keep indefinitely.
Following table sums up the period for which records should be maintained .
|Records/documents (Year)||Period for which records must be kept|
|1||pay statements and brokerage slips|
|3||W-2 forms,1099 forms, 1098 forms .,Receipts for charitable contributions, Proof of contributions to a traditional IRA and 529 savings|
|6||tax returns and documents related to deduction exemption claimed in those returns as IRS audit may happen upto six years|
|7||For writing off bad debts and bad investment in securities|
|10||Claim of foreign tax credit or as a deduction up to 10 years|