Keeping Tax Records

Each year we go through the ritual of gathering up the information we need to file our federal income tax return. Once we've completed our return, we organize all of our current records and file them with our prior returns. We then stare at our bulging files and think to ourselves... How long do I need to keep my tax records?

In this publication, we're going to discuss the recordkeeping requirements for individual taxpayers. As part of that discussion, we'll not only talk about the records you'll need to keep, but how many years you need to keep your tax records before you can dispose of them.

Tax Records

Additional Resources

When you're preparing a tax return, you're going to want to pull together all of the paperwork you'll need to complete your return. The standard tax preparation checklist includes:

W2 forms from all employers.
Your 1090G if you've received a refund of state or local income taxes.
Any 1090 form that you've received for the payment of dividends, income tax withholding, or other forms of income.
Receipts for any itemized deductions you might be taking on Schedule A.
Records and receipts for any other income or expense you think might affect your federal income tax liability.

Tax Recordkeeping for Expenses

If you're eligible to deduct travel, entertainment, transportation, or charitable gifts, then you're going to need to provide proof of such expenses. In this case, adequate records are considered written evidence documenting these payments. Acceptable written evidence includes receipts, canceled checks, bills or paid invoices that support your claims.

Generally, you'll want to create a complete written record of all expenses claimed on an income tax return using the following four dimensions:

Amount - this is the actual cost of the expense, and the most common form of this written evidence is a receipt or invoice.
Time - here you'll want to keep a written record of the dates you traveled on business, entertained clients, or if the expense involved local travel, the dates of car rentals, train tickets, or taxi fare.
Destination - this includes the name of the city or town you traveled to, the address of the restaurant, or the place of entertainment. In the case of a gift, you'll want to keep a written description of the gift.
Business Purpose - finally, you'll also want to keep a written record of the purpose of the business expense, as well as the professional relationships of all individuals involved.

Charitable Donations

Individuals wishing to claim charitable gifts of money now have three options available to them to prove they made this donation:

Bank Records - a bank record would include canceled checks, credit card statements, or a statement from their bank or credit union showing the name of the charity, date, and amount of donation. Credit card statements need to show the transaction posting date as well as the name of the charity.
Written Communication - all written communications received from the charity must show the name of the charity, date, and contribution amount.
Payroll Deductions - if a taxpayer wishes to deduct a donation made via regular payroll deductions, they will need to retain their pay stub, IRS Form W-2, pledge card, or another document provided by their employer that shows the charity's name, date, and the amount of the donation.

In the case of charitable donations, the IRS requirements no longer allow written logs, diaries, or notes made by the taxpayer at the time of donation. These types of records are no longer considered sufficient proof of the donation's value.

Maintaining Accurate Tax Records

Certainly, there are a good number of reasons to maintain accurate tax records. They can help identify the exact source of all income, they can help taxpayers track their deductible expenses, and they can aid in the process of preparing a tax return.

The basic kinds of records you'll want to maintain include:

Proof of Income - including bank and brokerage statements you've received, Form W-2, Form 1099, and Form K-1 if you're involved with a partnerships and / or a Subchapter S corporation.
Investment Gains and Losses - including statements received from mutual fund and brokerage houses, Form 1099, and Form 2439 (Notice to Shareholder of Undistributed Long-Term Capital Gains).
Deductible Expenses - including all written documentation received from charities, in addition to canceled checks, receipts / sales slips, and invoices.
Home / Housing Costs - including the receipts that can be used to document major improvements you've made to the home, closing statements, and insurance records. This information can be used to adjust the cost basis of your home when it's sold.

When it comes to providing proof of payments, you'll want to maintain for each type of payment:

Cash, Credit, or Debit Cards - the amounts paid, the name of the payee, as well as the dates of all payments.
Checks / Electronic Funds- in addition to the above-mentioned information for cash, you'll also want to record the check / reference numbers and the dates these transactions were posted to your bank accounts.

Other records that you'll want to keep include those associated with: alimony paid, casualty and theft losses, child care expenses, charitable contributions, education expenses, un-reimbursed business expenses, gambling winnings or losses, retirement account contributions, mortgage interest paid, moving expenses, pensions / annuity payments, taxes paid, and tips received.

If the above list looks familiar, that's because these are the categories of deductions as well as sources of income that are accounted for when completing a tax return.

Retaining Tax Records

As stated at the beginning of this publication, taxpayers often find themselves asking a very reasonable question: How long do I need to keep my tax records? The answer to this question is relatively straightforward. The Internal Revenue Code requires you to keep your tax records for as long as they might be needed to prove a claim on a tax return.

Essentially, this requirement translates into a "period of limitation" that applies to tax returns. The table below outlines the periods of limitations that apply to individuals. The timelines mentioned below start with the return's filing deadline. If a tax return was filed before its due date, the timeline still begins on the filing deadline.

Tax Record Period of Limitation

Tax Condition	Period of Limitation
Income is not reported and it is more than 25% of the gross income shown on the return	Six years
A fraudulent return is filed	No limit
A tax return is not filed	No limit
A claim is filed for a credit or refund after the return was filed	The longer of 3 years or 2 years after the tax was paid
A claim is filed for a worthless security	Seven years
All other tax conditions	Three years