Chicago Tax Lawyer

How Long to Keep Tax Records (and What to Keep)

How long do you need to keep tax records? You should save completed tax returns indefinitely, while supporting documents should be kept for at least 3 – 6 years. You’ll thank your past self for saving these records in the event of a tax audit!

Anyone can become the target of an IRS audit; a certain percentage of audits are selected at random to collect sample data. If this happens to you, having detailed records on hand will make the audit process a breeze and help ensure you get to keep any deductions you’ve claimed.

Read on to learn more about what tax records you should save and for how long!

How Long To Keep Tax Records

The IRS has 3 years to initiate an audit, beginning from the time you file your tax return, so you should certainly hang on to any important records for at least 3 years.

During the audit process, the IRS can expand the audit window to 6 years if the examiner believes your income was underreported by 25% or more. For this reason, we recommend saving most records for 6 years.

If the IRS has reason to suspect fraud, there is no limit on how far back they can audit you.

Tax Documents To Save For 3 – 6 Years

Which tax records should you save? These are some of the standard documents we recommend saving for at least 3 years in case of an income tax audit:

  • Forms reporting your income, including wages, dividends, interest, and capital gains or losses
    • W-2 forms reporting wages
    • 1099 forms reporting miscellaneous income
  • Receipts for any expenses claimed as tax deductions. Note that credit card statements don’t count! You’ll need actual receipts to back up your deducted expenses. Examples of the types of deduction records to keep include:
    • Medical expenses
    • Business travel and meals
    • Home office expenses
    • Mileage logs for vehicle deductions
    • Professional subscriptions, memberships, or classes
  • Receipts for charitable contributions
    • If you’re donating an item worth $5,000 or more, we recommend saving a professional valuation document
  • Gift letters for tax-exempt gifts
  • Records of your health insurance or records documenting your exempt status
  • 1098-E forms reporting interest paid on qualifying student loans

Additional Documents For Business Owners

Businesses may also be targeted for a payroll audit and/or a sales and use tax audit. In addition to the documents above, we recommend that business owners keep the following for at least 3 years:

  • Sales journals
  • General ledgers
  • Inventory logs
  • Sales tax exemption certificates, if used
  • Payroll records for all employees

Tax tip for business owners

Good bookkeeping is a business owner’s best friend! Not only will organized records help you substantially in the event of an audit, but it’s crucial to track your revenue and expenses for a clear picture of how your business is performing at any given time. Ask about our range of bookkeeping options!

Tax Records To Save Beyond 3 – 6 Years

As we mentioned above, you should keep your completed tax returns indefinitely. We also recommend saving these types of records longer than the standard 3 – 6 years:

  • Purchase records for investments such as real estate, stocks, mutual funds, cryptocurrency, and other investments
    • These records should include the purchase price (cost basis) and date of purchase
  • Records for stocks, cryptocurrency, and other investments that you inherited or received as a gift
    • These records should show the original purchase price, original date of purchase, and the date you received the investment
    • You may need extra records to prove eligibility for the Section 1202 exclusion or other specific items
  • Birth certificates or adoption records for your children
  • Divorce decrees

With a little preparation and organization (and armed with the knowledge of how long to keep tax records), you can make a potential tax audit run much more smoothly.

Plus, good records can help lower your tax bills each year! Our experienced tax attorneys can help you take advantage of every possible deduction. Schedule a confidential tax preparation consultation today.

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