Maybe you've heard of that seven-year rule? It says that you should keep all your receipts and records for at least seven years. That's not true in all cases, but knowing what you should keep, and how long you should keep it, can be confusing and complicated. According to the IRS website, there are no hard and fast rules on how long you should hang onto documents. Nor are there rules for how you should keep them (paper copies, online, or scanned and stored to a hard drive). You will just need to have access to them if you should ever get audited or need them for other purposes. (See also: 6 Quick Tips for Organizing Your Finances )
The Tax-Review Period
The basic period for IRS tax review is three years. Yes, that means that even if you filed your taxes this year, got your refund or paid your taxes due, the IRS can audit you for up to three years. If it is suspected that you filed a fraudulent claim, or you owe more taxes, there is a chance you could be asked to show some documentation. So a good rule of thumb is to keep everything related to your taxes for at least three years.
Outside of the three-year tax review window, there are other reasons that you could be audited or asked to show your tax documents. The length of time the IRS has to ask for these documents varies. Here are some examples:
- If you goofed on reporting your income by more then 25%, the IRS can audit you and ask to see proof of income for up to six years. So it's a good idea to hang onto your tax-related documents if you think you may have under-reported your income in any way.
Other Reasons to Keep Records
Even if you don't need some of your records for IRS purposes anymore, you may want to consider if you need them for another reason before tossing them. For instance, you may need documents related to your home for insurance purposes. If you own an item or piece of property, it's a good idea to hang onto any documentation related to those items. You could find yourself needing them for a warranty or return.
It's also a good idea to hang onto your past income tax returns. There are so many programs that require proof of income, such as food stamps and medical aid assistance, and usually furnishing a past tax return is all the proof you need. It's also helpful in having past tax returns to prepare future returns.
When we decided to build our first home a few years back, our bank was a stickler about having proof of income — primarily because I had recently transitioned to the realm of the self-employed. I had to provide both proof of income as well as a recently filed tax return.
In any case, it's a good idea to hang onto all tax records for at least the three-year period that you could be audited .