Storing Tax Records

Many people think there's no substitute for keeping tax returns and supporting records forever. True, if you've been filing grossly fraudulent tax returns (or not filing at all), the IRS can go back to the time you were in diapers in search of income to tax. But if you are fundamentally an honest taxpayer, you don't need to keep decades of past tax returns.

  • If your tax situation is very straightforward. The minimum time to keep your income tax returns and supporting documents is three years from the return's original due date, including extensions. If all or most of your income comes from wages and investments, and you have no unusual tax transactions like a home sale, you should be okay adhering to this schedule.
  • If your tax situation is more complicated. Save all of your tax returns and documents for at least six years if your tax situation is more complex. For example, where you have income from self-employment or have substantial investment gains or losses or simply have some doubts about the accuracy of past tax returns. The reason for keeping the records longer is that the three-year time limit doesn't apply to taxpayers who fail (intentionally or not) to report a substantial amount of taxable income.
  • Hold onto indefinitely. There are some documents that should be kept in a separate file indefinitely, including:

- Records supporting cost basis for investments such as stocks, mutual funds, and collectibles. You'll need to hold onto these until you sell the investments in order to prove how much you paid for them. Incidentally, you generally don't need to maintain such records for investments you hold in retirement accounts since capital gains and losses in these accounts are not subject to income taxes. The only taxes you pay on retirement accounts are generally assessed when you make withdrawals and are not based on an investment's cost.
- Records supporting your home purchase and home improvements. Finally, hold on to all records pertaining to the original purchase of your home, including the closing statement, as well as any improvement you have made to your manse. These may come in very handy when you eventually sell your home.

The IRS has a fine publication on why you should keep records, what kinds of records you should keep, and how long you should keep them.

IRS Publication 955