Do you really only keep 7 years tax returns?

Al in Ohio said:
I used to keep mine up to five years but then found out that was too much. It’s three years back per the IRS. After three years you cannot be audited and you will hever be questioned beyond three years prior. So pitch it!
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It's 6 years if the IRS believes you significantly understated your income or overstated your basis in the sale of a capital asset. If your income is well documented on W-2s or 1099s and you don't own any foreign property or bank accounts, then 3 years is fine.

If you sell a high-value house and are adding a lot of improvement costs made over several years to the basis, then it's probably a good idea to hang onto that documentation for 6 years.
 
We have have retained all tax records dating back to 1995 when we bought our first scanner and started to e-file. We switched over to paperless record keeping completely in 1999 and haven't looked back. We have retained all bank, credit card, and major purchase and expense invoices since 1995 in PDF format. We back all the data onto our home storage servers and also offline onto SDXC cards and USB thumb drives. It really reduces clutter in the house. One day we will figure out what to do with our massive collection of books (probably donate them) and other stuff we don't really need. We don't want to end up in the same situation as our parents who are facing that dilemma of "too much stuff" in their 80's.
 
cathy63 said:
It's 6 years if the IRS believes you significantly understated your income or overstated your basis in the sale of a capital asset. If your income is well documented on W-2s or 1099s and you don't own any foreign property or bank accounts, then 3 years is fine.

If you sell a high-value house and are adding a lot of improvement costs made over several years to the basis, then it's probably a good idea to hang onto that documentation for 6 years.
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We ended up with taxable capital gains on our house sale in 2018, so we'll be keeping the supporting documentation and improvement receipts associated with that house for a while.

As it is, the purchase of the house we sold in 2018 occurred prior to 1997, and we had deferred capital gains from the prior house sale to that (this was two years before the $250k/$500k homeowner's exemption was implemented). So, we have the documentation and improvement receipts for the sale of the previous house sold. Along with a faded Xerox copy of Form 2119.
 
Letj said:
I guess I am just confused about how the process works. When I review my portfolio, it usually shows me from inception including additions and reinvested income. I was hoping this would be sufficient for the IRS. What am I missing?
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If it's a taxable account and you have purchased an asset inside it, in order to prepare your tax return properly when you sell that asset, you'll need to know the date it was purchased and the amount it was purchased for. In some cases you need to know more bits of information.

Your brokerage firm may or may not have that information. Depending on when you bought it and what kind of asset it was, they may be required to track it. Broadly speaking if you've bought the asset in the last few years then they are required to track it for you.

Sunset said:
Whew...... Thanks for answering that :flowers:, as I suddenly thought with horror how would I track the contributions made for all the years for both of us... :(
I never thought about it, since I believed it's non-taxable when withdrawn since taxes were already paid on contributions.
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As long as you're over 59.5 and have had a Roth for more than 5 years (which it sounds like you have), then you're right -- no taxes and no penalties on any withdrawals.
 
I have all my returns and supporting documents going back to 1981. I still have rental real estate purchased in 1988, so I will definitely keep returns going back that far for the purposes of researching depreciation and other items taken for various expenses over the years.
 
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Having my tax returns from 1998 saved my butt 2 years ago. I had withdrawn contributions I used to open a roth that year and the IRS called me on it and said I owed about $30K in taxes and penalties on the withdrawal. When I went to my broker they had kept no record of when I opened the roth or for how much, and apparently the IRS didn't either, or else were too lazy to look up my 98 return themselves. Anyway, there in the back of my filing cabinet was a frayed copy of my '98 1040, which suddenly became worth about $30K to me. I quickly sent it in and waited several months to get the letter from the IRS saying I owed nothing. Phew!
 
Al in Ohio said:
It does for anyone who doesn’t massively understate income by the limits stated. If I ever made a mistake it would be in the category with a statute of limitations of 3 years. That probably applies to most.
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The problem is how do you show they are wrong without records?

Same comment if they lost your return and allege you did not file. Statute never runs on an unfiled return.

As I said, not a huge risk for most people but something that does happen.
 
We have hard copies back to 1990. I’ll let my kids dispose of them. Don’t trust computer storage or the IRS. Accountant has PDF’s from last 4 years
 
cat4ever said:
Having my tax returns from 1998 saved my butt 2 years ago. I had withdrawn contributions I used to open a roth that year and the IRS called me on it and said I owed about $30K in taxes and penalties on the withdrawal. When I went to my broker they had kept no record of when I opened the roth or for how much, and apparently the IRS didn't either, or else were too lazy to look up my 98 return themselves. Anyway, there in the back of my filing cabinet was a frayed copy of my '98 1040, which suddenly became worth about $30K to me. I quickly sent it in and waited several months to get the letter from the IRS saying I owed nothing. Phew!
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I don’t get it, I thought you don’t report roth contributions on your taxes unless it’s conversion of ira or distributions (8606 form)? So how did 98 taxes help you?
 
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Sorry, I should have specified It was a conversion. The principal on conversions can be withdrawn without penalty (or taxes since they've already been paid) after 5 years.
 
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Montecfo said:
Ncbill,

I did not note differences in your link compared the the brief example I gave, or my understanding. Perhaps you can point me to the point you are making.

Thanks.
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Past 3 years the IRS needs to provide evidence if they claim you've understated income/overstated basis by more than 25%...they simply can't say you did so & assess penalties...so the burden of proof shifts to them after the 3 year audit period (during that time the burden of proof is on you)

As others have noted, W-2 earners aren't very likely to ever face such a claim.
 
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ncbill said:
Past 3 years the IRS needs to provide evidence if they claim you've understated income/overstated basis by more than 25%...they simply can't say you did so & assess penalties...so the burden of proof shifts to them after the 3 year audit period (during that time the burden of proof is on you)

As others have noted, W-2 earners aren't very likely to ever face such a claim.
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I did not mean to suggest they would do so with no proof. Trouble is you would need proof to refute it. So when someone suggested earlier in the thread that they shredded their tax returns thinking that might be a defense against a substantial understatement or fraud, I just wanted to point out that was not the case.

I also made the point that being assessed in this manner is unusual. But it is not impossible.
 
I recently starting purging old papers and shredded of all our tax returns before 1999 Almost all were the short form such we had nothing but W2 income and relatively little investments. I have returns from 2000 on in softcopy, kept encrypted as they have SS numbers for both us and our kids on them.
 
I keep all years, forever. Because:

1. There is no statute of limitations if the IRS can prove "fraud."

2. I will need to verify my income year-by-year to confirm Social Security calcs my benefit correctly.

I still have all tax returns going back to my first job in high school.
 
Take it from someone that has prepared taxes for 20 years and participated in multiple IRS on site and paper audits.. Not having the back up is a big disadvantage. You will sleep better if you save any tax return that has "legacy" implications: i.e Rental Property , IRA conversions , Taxed Trad IRAs, Business property,..Stocks that have moved from one broker to another etc..Estate items, For simple returns with just general W2 income, yes 3 years. Mine go back to 1970. -- I guess my kids will get a kick out of seeing my annual income back then...
 
Several years ago I was unable to renew my NC driver's license because a NY state resident had an unpaid ticket from the state of Maine in 1985. He had the same name and DOB as me. My fed/state tax return showed that I lived in KY in 1985. That data was helpful in trying to prove a negative. dave
 
I recently started keeping all tax returns forever but disposing of the back up documents after 7 years with the exception of 1099R’s, 8606 and 5498.

I read this somewhere.

But for the longest time I only kept everything for 3 years.
 
Onward said:
I keep all years, forever. Because:

1. There is no statute of limitations if the IRS can prove "fraud."

2. I will need to verify my income year-by-year to confirm Social Security calcs my benefit correctly.

I still have all tax returns going back to my first job in high school.
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1. I don't think that's correct. There is no statute of limitations if you don't file a return. However, if you do file a return, I believe the limit on fraud is 6 or 7 years. Of course, someone could be concerned that the IRS loses track of the fact that one filed a return in the first place. If that's the case, then the only thing I can think would be proof of mailing -- having a copy of a return from 1975 doesn't prove that you sent it into the IRS.

2. You can verify it by checking your data against SS records online each year. If there's a discrepancy, I'd fix it as soon as I found it rather than wait for 20 years or whatever. Of course, I trust the SSA to keep track of my earnings and not lose them; maybe I shouldn't. Maybe I'll print off a copy of my earnings record from them.
 
My husband and I retired 5 years ago, and at that time I had all our returns back to 1979. We made a move to another state, and I shredded all the old ones then. I flipped through for nostalgia sake (we made nearly $8,000 in 1979!) I haven't missed or needed them at all. Now I only keep 7 years and regularly shred old ones.
 
braumeister said:
I keep them all as PDFs (with multiple backups). I scan all associated paperwork and file those PDFs with the return, one folder for each year. Every piece of paper goes through the shredder. It's trivial to print those old PDFs if I need to, so why bother keeping the originals?
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+1
I only keep returns for 3 years for a reference
 
I keep tax records any year houses are sold. You never know when you must defend the "basis" of homes for tax purposes. (We've had 6 homes in our married life.)

But right now, the house prices must be over $500K for a couple to get a 1099 form. Never know when that will change.
 
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