April 15 is seen as the end of the traditional tax-filing season. And, while it may be tempting to purge certain tax documents from your files for the current and past tax years, you want to be careful. It is important to retain relevant tax records in the event that the IRS — or another taxing authority — requires that those records be produced as part of an audit.

Keep at Least 3 Years

The following records are commonly used to substantiate a taxpayer’s income and deductible expense items:

  • Form(s) W-2
  • Form(s) 1099
  • Form(s) K-1
  • Bank and brokerage statements
  • Canceled checks or other proof of payment of deductible expenses

At a minimum, the above tax records should be kept for a three-year period following the date that you file your return (or its due date, if later).

However, the IRS’s time limit for initiating an audit on a return where income was grossly understated, but no fraud is discovered, is six years. Therefore, it is ideal to retain the above documents for six years to better protect yourself in the event of an audit.

Similarly, you should keep investment records (brokerage statements, etc.) after you liquidate any given investment. Documentation that substantiates the gain or loss on an investment should be kept for the length of time that corresponds with the time frame that you retain other tax documents related to the return on which you report the sale.

Prior Years’ Tax Returns

It is also a good idea to maintain one or more permanent files with important legal and personal documents, including those relating to taxes. Specifically, as a general rule, you should retain copies of your federal and any state income-tax returns (and any tax payments) indefinitely. For instance, the IRS or another taxing authority could claim that you never filed a particular year’s return. If that occurs, the IRS (or other authority) could assess tax and penalties relating to the return in question. You will need a copy of your return to bolster your position that you actually filed the return.

Need More Information?

Filing your returns on a timely basis is just one aspect of properly handling your taxes. Be prepared to defend yourself in the event of an audit by retaining your records for the appropriate time period.

For more information on what business and personal records you should keep, download our Records Retention Schedule, or contact Doeren Mayhew’s Tax Group, with CPAs in Troy, Houston and Ft. Lauderdale.