How Long to Keep Tax Records? Must-Read Guide for Every Taxpayer

Filing taxes timely is only half the work done; now you need to save all the receipts properly in a safe place for all the just-in-case situations. Well, the IRS has guidelines for taxpayers that explain how long to keep tax records, financial income reports, and other documents. For businesses, using professional bookkeeping services can make this process much easier and more organized.

Knowing the timeline helps to keep your accounting side intact while not hoarding unnecessary documents for a longer period. To settle these things, we have written a proper guide that will explain how long you should keep tax records and how to stay compliant and organized. Startups can also benefit from accounting service for startup to manage their financial documents efficiently. So, read this blog till the end to learn more!

Why Should You Keep Tax Records?

Keeping regular tax and bonus tax rates filing receipts is not just an option, but a necessity for your financial life. These are not just old papers, but your safety net that protects you against odd situations. You can use these documents to claim tax rewards, for credit card bills, and in your yearly audits. Professional year-end accounts services ensure that your annual reporting is accurate and compliant.

It is important to keep bank records for a specific period of time according to the IRS. Once the period is over, and you have claimed and assessed additional taxes and rewards, you can simply discard them. Also, here’s another point to note for “how long keep tax records” is that every country and region has its own period of limitation, so staying prepared according to those timelines is the best thing. Using cash flow management service can help track your finances and maintain proper records.

So in simple terms, these records make you eligible for OASDI tax deductions, avoid penalties, and facilitate the seamless functioning of your business without any financial trouble. 

Moving ahead, let’s discuss how long keeping tax records is necessary and in more detail. 

How Long do I Need to Keep Tax Records?

It is ideal to keep the tax receipts, income reports, and other supporting documents for at least three years from the payment date. 

According to the Internal Revenue Service, within these three years: 

• You can claim tax refunds and amendments. 
• Can show a proper accounting report for clean auditing, which is simpler if you use payroll accounting services to keep track of employee payments.

Please note that this is a general rule that applies to every individual and not just businesses. Under the statute of limitations, you must keep these documents with you:

• Form W-2 and 1099 forms
• Receipts for expenses and deductions
• Verification of charitable contributions
• Documentation validating tax credits
• Statements from banks and brokerages are utilized for tax purposes

Now that you’re aware of how long do you have to keep tax records, let’s understand the situations when you need to hold records for longer than three years. 

When Should You Hold Tax Records for More than Three Years?

The IRS’s answer for “how long to keep tax records” is at least three years. However, it also says that there are certain cases when you must retain it for more. In addition, the tax situations lengthen the statute of limitations of audit, revision, and legal necessities, which means your financial records are most useful during up to seven years or longer. 

These are the financial situations when it’s necessary to retain tax records longer than 3 years: 

• If you have Underreported Income: When your income suddenly increases significantly, and the tax payment is less than 25% of your current one, the IRS may notice. In such cases, bank statements, income proofs, and tax reports from the past six years help to support your case. 

• Claim a Loss/Bad Debt: Keeping tax receipts for seven years is a good idea if you want to report losses of securities and bad debt. These type of claims requires thorough authentication and document backup. 

• Keep Permanently for Fraudulent Claims: Staying protected against fraud is an unsaid need, and there is no limitation of time in this case. It is always best to have your previous tax records secured forever as a security line to show as proof. 

• Employment and Business Records: Whether you are employed in a company or run your own business, it is expected that you retain the records for at least 4 years from the date of filing. For business owners, the records must contain payroll processing information, the identification numbers of the employees, and tax withholding statements. 

• Unfulfilled Refund Claims: It may happen that you overpay tax or forget to claim refunds immediately. In such cases, having the right documents at least until you get your refunds back is important. To be on the safer side, retain the record for a few years from the date of claim settlement. 

Also Read: UK Tax Year: A Branded Guide to Stay Compliant with Tax Regulations

How Long do you have to Keep Your Tax Records State-Wise?

The IRS sets a standard rule regarding the statute of limitations and time period, but every American state has its own policy for auditing and reviewing tax returns and timelines. According to the Federal law, you must retain the record for three years and consider the rules and regulations laid by your state taxing authority. 

We have classified the states below based on their varying length of time for retaining state tax records. 

States Following 3-Year Rule 

• California
• Arizona
• Colorado
• New York
• Oregon
• Utah
• Virginia

Here, the state’s Department of Revenue only audits the reports up to three years from the date of tax payment. 

States Following 4-Year Rule 

If you are employed or run a business in these states, it is advisable to keep all your financial documents secured for four years.

• Kansas
• Minnesota
• Wisconsin

Also Read: Washington Sales Tax: Learn About Local and Washington Sales Tax Rate, Nexus Laws, and Filing Requirements

States Following 5-Year Rule 

If you are living in these states, having W-2s, 1099s, deduction receipts, and income proof is important for a financially sound life. 

• Massachusetts
• New Mexico
• Ohio

States Following 6-Years or Indefinite Record Retention 

These are the states that have 6-year or more audit windows. Since six years is a long time, and there can be fluctuations in income, the reports, and statements serve as a safety net. 

• Montana
• Washington, D.C.
• North Dakota
• Nevada
• Texas
• Florida

Moving forward, in this how long to keep tax records guide, let’s explore the documents that you should always keep in files. 

What Tax Records Should You Keep?

There are certain mandatory documents that the government consider legal for tax liability audits. Having these records straight helps to ensure that the audit process is smooth and the settlement of refunds and claims is faster. 

These are the essential records: 

• Receipts and Invoices: Keep all the bills, like medical, home expenses, and supplies, handy to showcase for exemptions. 
• Assets: If you buy any property or other major asset, having the receipts and documents is important. 
• Bank Statements: Keep track of the bank and credit card statements for smooth financial verification. 
• Donations: Charity donations are tax-exempt; thus, having the invoices for the payment and proof is necessary. 
• Income Statements: Have a proper record of the streams of income. Register in government-authorised W-2s, 1099s, and self-employment records. 
• Retirement and Insurance Receipts: Have all the invoices for contributions towards IRAs or 401(k). 
• Tax Payments: It is mandatory to keep invoices for the returns for the past three years. 

We know it is quite tedious to hold all these documents for years, so it is advisable to immediately take pictures of the receipts and back them up in the cloud to avoid anything missing. 

Wrapping Up!

Having a clear idea of how long do you have to keep your tax records and what documents you need is important for a healthy financial life. Whether you are a business person or an employee, paying taxes is unavoidable and holding the record for a minimum of three years is a mandatory rule to follow. 

We have explained how long to keep records based on different states and the benefits of following this practice in this blog. Hopefully, this will help you plan things out for better finances. 

Read Next: Purchase Price Variance: Importance, Formula, Examples, Affecting Factors, and Much More

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