The Art of Letting Go (of Documents): Record Retention Made Easy
Another April 15th has come and gone and I am recovering well from computer eye strain and staple wounds. Next up for me is some clean-up. I hate clutter and I love getting rid of things I don’t need anymore. I blame my upbringing. As the daughter of a career Army officer, we moved frequently and had to travel light. However, documents accumulate during tax season and now decisions have to be made regarding what to keep and what to purge.
You may be in the same situation. Maybe you just received your tax documents back from me and are wondering what to do with them. Maybe you’re trying to decide if you have to keep that pile of 1099s, receipts and charity acknowledgment letters you scanned and uploaded to your portal. Maybe you’re just preparing to move and/or downsize? For whatever reason, let’s review what you should keep and for how long.
Why is Record Retention Important?
In the event the IRS or a state tax authority audits you, the burden of proof is on you, the taxpayer, to substantiate deductions and expenses. Substantiation includes proof of payment, receipts, etc. Failure to provide proof may result in disallowed deductions and assessment of additional taxes and penalties.
It’s also important to retain records that prove the cost basis for assets you still own. This is critical when downsizing and trying to establish the cost basis of a residence you may have been living in for 30-plus years. The higher the cost basis, the lower the taxable gain.
The Magic Numbers: How Long to Keep What
The amount of time I recommend you keep your supporting tax documentation, whether in paper or digital format, is based on the statue of limitations. That’s the period of time the IRS has to audit, review, change or assess your return.
3 Years – The statute of limitations for the IRS to audit your tax return and assess taxes you owe is three years from the due date of your return. Returns filed before the due date are treated as filed on the due date. If you extend your return, the three years run from October 15. For a return just filed by April 15, 2025, the IRS has until April 15, 2028, unless any exceptions extend the statute. This also means you have until April 15, 2028, to amend your tax return to claim additional deductions or credits you may have missed.
6 Years – The statute may be extended up to six years by the IRS if your return includes a “substantial understatement of income.” Omitting more than 25 percent of your income is considered substantial.
7 Years – This is a catch-all period often quoted as the length of time you should keep your backup documents. It represents how many years back the IRS can go if there was a claim for a loss from a worthless stock or bad debt deduction. It’s used generically as the recommended period of time to retain your tax records because it’s the longest period for taxpayers who filed a return without a substantial understatement of their income or fraud (there’s no statute of limitations for a fraudulent return).
Forever – Yes, there is a forever option. Keep copies of filed tax returns indefinitely. They contain information (carryforwards, credits taken, basis, etc.) that you may need in the future. If you don’t file a tax return, keep any backup indefinitely since the statute doesn’t start running until you actually file a tax return.
When in Doubt…
Tossing old tax documents might not spark quite as much joy as Marie Kondo promises, but it comes close. Knowing what to keep (and for how long) gives you the confidence to declutter without the fear of an IRS surprise. So, grab your shredder, queue up your favorite playlist, and enjoy the oddly satisfying process of letting go.
And remember: when in doubt, don’t throw it out – just ask me.