The IRS recommends that you keep your tax returns for a minimum of three years after filing. But there are plenty of records that go into preparing a tax return and it’s not always as clear just how long you should keep all of that paperwork. It seems pointless, in particular, to keep every last little receipt you’ve received – even if the IRS audits you, is the agent really going to want a record of that bag of burgers you picked up for dinner six months ago?
The simple truth is that while it is a good idea to maintain good financial records for a given year for at least three years after filing that year’s tax return – based on how long the IRS has to audit tax payers – there are some pieces of paper that are going to be more important and that you should make sure you keep, often longer than that three year deadline.
Keep These Seven Pieces of Paper
- Paperwork relating to disaster relief: If you received any form of disaster relief, it can dramatically impact your taxes. After Hurricane Katrina, for instance, numerous tax payers received tax relief or tax credits. The paperwork on such situations can be necessary to explain differences in your tax returns in the future, however.
- Documentation of medical expenses: If you amassed enough medical expenses in a given year to be able to write them off, you’ll want to keep documentation of those medical expenses. The receipts for your payments will be especially important, so make a point to pull them out of the shoebox (or wherever you generally keep your old receipts) and file them with your medical records.
- Documentation of worthless securities or bad debt deductions: The IRS singles out losses as a potential issue, recommending that you keep documentation on them for seven years after filing your tax return, rather than the usual three.
- Home improvement receipts: It’s a no-brainer that you should be keeping any documents related to purchasing and owning a piece of property, but you want to make sure that you’re keeping receipts for any home improvements you make. Those receipts can be used to lower your tax bill when you sell the house (although you likely won’t be facing a tax bill if you’ve lived in the house longer than two years, don’t rent part of it out and your profit is under $250,000).
- Purchase records for stocks, mutual funds and other investments: Because of the taxes that go along with selling those investments, you’ll need to be able to show what you paid for them originally. Documentation related to such purchases needs to stay in your files until you’ve actually made the sale and paid the taxes on your gains.
- Legal filings related to your taxes: A good general rule is if something was a matter for the courts, you want to keep a copy. That includes legal disputes over money as well as more run-of-the-mill filings such as wills. Legal paperwork should usually be kept indefinitely, simply because it’s not out of the question that the matter could be revisited, if only in an audit.
- Copies of all checks and other payments made to the IRS: Even the IRS is not perfect at handling paperwork and sometimes issues do come up. Having a record of your payment, such as a canceled check, can make a world of difference in how quickly a question can be resolved. You never want to have to scramble to try to demonstrate that, yes, in fact, the IRS already received your tax payment.
Keeping Other Paperwork
The paperwork you want to keep on hand for the IRS is not always the same as what you’ll need for your tax records. Furthermore, many states have a longer time limit in which they can choose to audit a tax payer. Check on your state’s recommendations through a tax professional or through the state’s tax agency.
Because of some nuances in the laws related to taxes, tax professionals usually recommend keeping your returns and other basic paperwork six to seven years – longer than the IRS’ recommendation. In part, that’s due to the fact that the IRS recommends maintaining records indefinitely in the event that an individual committed tax fraud. If you find yourself in a position of needing to prove that everything in your taxes was handled correctly, you need to have those documents on hand. There are also some differences in what a business owner needs to maintain in terms of records. It is worth checking with your tax professional to make sure that you’re keeping the documentation you need, just in case.
You may also want to take a good look at where you’re keeping your documentation. The IRS doesn’t take a flooded basement as an excuse during an audit, so making sure that your documentation is safe and sound can be an important preventative measure.