The IRS generally has three years to audit a tax return, beginning with the later of the return’s due date or the day you submit. You can also file an amended return within this time window if you missed anything.

Here’s what you should know about keeping financial records for your tax returns.

The IRS generally has three years to audit a tax return, beginning with the later of the return’s due date or the day you submit. You can also file an amended return within this time window if you missed anything.

Here’s what you should know about keeping financial records for your tax returns.

FEDERAL TAX RECORDS

Despite the three-year rule, many tax professionals advocate keeping copies of your completed tax returns indefinitely as proof that you submitted. Even if you don’t maintain returns indefinitely, keep them for at least six years after they are due or filed, whichever comes later.

It’s a good idea to retain records supporting items on your individual tax returns until the three-year statute of limitations expires. Canceled checks, charitable donation receipts, and paperwork confirming mortgage interest payments and retirement plan contributions are all examples of supporting records. If you discover that you missed something, these papers may help you file an updated tax return.

So, what records can you throw away today? According to the three-year rule, you’ll soon be allowed to discard most documents related with your 2020 return if you submitted by the due date (which was extended to May 17, 2021 due to the pandemic). Extended 2020 returns may still be subject to audit until October 15, 2024.

Also, certain tax concerns are still being investigated after three years. If the IRS thinks that income has been underestimated by 25% or more, the statute of limitations for an audit is extended to six years. If no return was submitted or fraud is suspected, the IRS has unlimited time to investigate.

Certain documents that support numbers that may influence many years, such as charitable deduction carryovers, should be kept until the deductions are no longer in effect. Also, do not discard records that support deductions for bad debts or worthless securities that may result in refund claims. You have seven years to claim them.

STATE TAX RECORDS

The prior standards are oriented toward meeting federal tax responsibilities. Contact the office for information on your state’s statute of limitations.

Furthermore, states typically have the authority to resolve matters relating to audited federal tax returns. So, keep records pertaining to an IRS audit for a year after it is done.

REAL ESTATE RECORD

Keep real estate records for as long as you own the property, plus three years after you sell it, and disclose the sale on your tax return. Keep records of the purchase, house upgrades, insurance claims, and refinancing documentation throughout the duration of ownership.

These documents serve to establish your adjusted basis in the residence, which is required to calculate any taxable gain at the time of sale. They may also facilitate rental property or home office deductions.

INVESTMENT ACCOUNT STATEMENTS

To appropriately report taxable events involving stocks and bonds, keep complete records of purchases and sales. Dates, amounts, prices, dividend reinvestment, and related costs all need to be recorded. Keep these records for the duration of your ownership of the investments, plus an extra period until the applicable tax returns’ statute of limitations expires.

The IRS requires you to preserve copies of Forms 8606, 5498, and 1099-R until all funds have been removed from your IRA. It is much more vital to keep records of all Roth IRA transactions in case they are ever questioned.

PURGE WITH CAUTION

Old tax documents take up space and, if not disposed of correctly, can lead to identity theft. However, purging too quickly may leave you with no defense if the IRS investigates. When in doubt, keep records for a bit longer than you believe necessary. Please contact PSA CPA if you have any inquiries.