While this is a straightforward question, there is a standard answer for most people, but others may have reasons to hold onto their records for longer. The easy answer for IRS purposes is 3 years. All you need to do is keep copies of your tax returns and records for 3 years, any after that aren’t required for IRS purposes.
The reason behind the 3-year rule is something call the statute of limitations. Essentially, the IRS has 3 years to find a mistake and initiate an audit. Many audits are simply a ‘prove this one or two thing(s) through the mail, fewer and fewer are the sit down in person audits for personal tax returns. If you had $100.00 of interest earned at your bank, and you innocently forgot to put it on your tax return, the IRS has 3 years to point out the mistake and calculate the additional tax due. If you forgot $100.00 of interest from a return that is 5 years old, the IRS is out of luck – as it is past the ‘statute of limitations’. The 3-year rule is ignored when the IRS considers the mistake to be ‘substantial’ – meaning they have much more than 3 years to collect the additional tax. Substantial has a couple of meanings, but an easy example would be forgetting to report the $100,000.00 you withdrew from your 401k (even though tax was withheld it still must be reported).
However, there are some who will want to keep their general records including tax records for longer. There is a unique term with the IRS and it is called ‘depreciation’ – essentially it is a deduction you take over time instead of all at once. Having the records for the whole time an item is depreciated is also important, as it is on the return it was originally reported on, but the item is listed on every return afterwards until fully depreciated. Many things are depreciated over 5 years, some 7, and others are different amounts. You aren’t able to pick and choose your depreciation rate, it is pre-set based on the item.
That generally covers it for IRS purposes on how long to hold on to tax records. To recap, the ‘answer’ is 3 years for the general public. When reviewing your tax return, please ask your tax preparer if you have anything that would necessitate keeping your records for longer.
Senior Tax Professional