Filing your taxes isn’t just a once-a-year endeavor. Maintaining good records throughout the year – and disposing of old ones when appropriate – not only provides you with greater confidence when you prepare your tax return, but it also provides you with documentation you may need in the future.
One of the most common questions I’m asked is, “How long should I keep my tax returns?” I recommend you keep all federal and state income tax returns and supporting documents for a full six years.
Why so long? Although in most cases the IRS has up to three years after you’ve filed your tax returns to assess additional taxes, the IRS can take up to six years to assess additional taxes if it determines that you omitted a substantial amount of income from your return. You may believe your returns are accurate and all-inclusive, but the IRS may think differently.
Be sure to keep in your files a copy of your tax return mailing receipts and electronic filing confirmations too. If your return is ever lost or misplaced, having a receipt showing the date the return was submitted will save you from penalties.
Some events produce documentation that should be kept permanently: settlement records from all of your home purchases and sales, investment purchases, divorce agreements, etc.
But just because an event ends doesn’t mean that the documentation process should. Regularly adding “updates” – home improvement receipts, investment records, estate and gift tax returns under which you received property, etc. – to your records and files will help to compute your gain/loss when you sell assets and answer critical questions in the future.
There are other situations in which you would benefit from keeping records, including any nondeductible contributions you make to an IRA or Roth IRA. Review your personal and financial history with a professional to ensure you have all your bases covered.