How Long Do You Need to Keep Tax Returns?

If you’ve just filed your federal income tax returns, you’re probably staring at a pile of forms and receipts, wondering what to do with it. Or perhaps you’re doing some spring cleaning, and the ever-growing dusty pile of tax records is standing in the way of a perfectly organized office. 

Either way, you want to know how long do you need to keep tax returns? We solve this mystery for you in the article below.

What Are Tax Returns? 

A tax return is a form you complete and submit to the Internal Revenue Service (IRS) every year. Your tax return reports your income, expenses, and other tax information to the IRS. By submitting your tax return, you calculate your tax liability and can possibly request a refund for tax overpaid. 

Why Are Tax Returns Important?

Not everyone is required to file a tax return in the U.S. Your tax filing status and gross income determine whether you are required by law to file tax returns. Even if you are an immigrant on a visa, you may be required to file taxes.

It could be useful to file your taxes, even if you aren’t required to by law. In some cases, you may be able to claim deductions that reduce your tax liability and could even result in a tax refund! 

If you are required to file your taxes but don’t file your tax return in time, it could mean late filing penalties applying. You want to avoid this at all costs, as this penalty just increases your liability over the long run. 

How Long Do You Need to Keep Tax Returns?

Let’s get into the critical question. How long do you need to keep tax returns?

The only reason you need to keep your tax returns and tax records is if the IRS has questions to ask you about it. So, the answer to how long do you need to keep tax returns depends on how long the IRS has after you submit your tax return to come back and ask you questions. If the IRS comes back to ask you questions, you need these records as a backup to prove everything you put on your tax return. 

The general rule of thumb for this is three years. In most cases, there is a three-year statute of limitations that apply. If there is nothing wrong with your tax return, the IRS can’t query your tax return after these three years expire.

But there are important exceptions to the three-year statute of limitations. In these situations, you need to keep your records for longer. 

If you substantially underestimated your income, the statute of limitations is six years. When will the IRS regard your income as substantially understated? If you understated it by 25% or more of your gross income. For example, if your actual gross income is $200’000, but you claimed it was $100’000, it would be regarded as substantially understated.

The six-year statute of limitations will also apply if you substantially overstated the cost of your property so you could minimize your taxable gain. If you sold a piece of property for $200’000 and claim you originally paid $100’000, but in fact, you paid $50 000, the IRS has six years to take action against you. 

Keep in mind, you have to keep records of the property you purchased for as long as you own the investment. If you ever sell the property, you will need these records to prove the cost you initially paid for the property. 

To make it easier, here is a short summary of how long you have to keep your records:

Which Documents Should be Retained?

Now you know how long to keep your tax records, the next question is what exactly are you supposed to keep? 

Overall, the IRS recommends keeping all the documents relevant to your tax return. This would be anything proving how much income you earned or anything else that supports the deductions you listed. Fortunately, you don’t have to keep every piece of paper for every item. For example, at the end of the year, you will receive a Form W-2, which is a summary of all your paychecks. This is the only record you need to keep for your paychecks.

Here is a summary of the documents you should keep:

How to Organize Your Records

There are few things worse than a pile of dusty, old financial records that don’t make logical sense. If you are going to go through the trouble of keeping your tax records, you can just as well organize it properly. 

There aren’t any specific requirements from the IRS on how to organize your records. They only recommend you keep them in a safe place. 

A common way to organize tax records is to file it according to year and then according to category. The best tip is not to wait until the end of the year before you actually organize it properly. File and organize the documents consistently during the year, so they are ready for when you need them.

You also don’t necessarily have to keep the physical records. You can store copies of your documents electronically in the Cloud. There are handy apps like CamScanner that converts pictures into PDF files so you can just snap your record and upload it. 

How to Get Rid of Your Tax Records

There will be a time when you can throw away some of your tax records when you are sure the IRS can’t ask about them anymore. When you throw out your tax records, do it carefully. Preferably use a shredder and then toss the shreds into the trash.

Your tax records have a lot of sensitive information on them. Your Social Security Number, address, and financial account numbers are just a few. If you don’t carefully get rid of your tax records, there is a chance someone can use it for identity theft.

Conclusion

Preparing your tax returns can be tedious but having all your tax records organized will definitely help. Especially if you need to dig them up for the IRS at a later stage. F1 visa students and TN visa holders aren’t excepted! As you can see, you could find yourself in a sticky situation if you throw away your documents prematurely. Make sure you won’t need your tax documents in the future before throwing old tax records in the trash! 

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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