What tax documents can you safely shred? And which ones should you keep?

Once your 2024 tax return is in the hands of the IRS, you may be tempted to clear out file cabinets and delete digital folders. But before reaching for the shredder or delete button, remember that some paperwork still has two important purposes:

Protecting you if the IRS comes calling for an audit, and
Helping you prove the tax basis of assets you’ll sell in the future.

Keep the return itself — indefinitely

Your filed tax returns are the cornerstone of your records. But what about supporting records such as receipts and canceled checks? In general, except in cases of fraud or substantial understatement of income, the IRS can only assess tax within three years after the return for that year was filed (or three years after the return was due). For example, if you filed your 2022 tax return by its original due date of April 18, 2023, the IRS has until April 18, 2026, to assess a tax deficiency against you. If you file late, the IRS generally has three years from the date you filed.

In addition to receipts and canceled checks, you should keep records, including credit card statements, W-2s, 1099s, charitable giving receipts and medical expense documentation, until the three-year window closes.

However, the assessment period is extended to six years if more than 25% of gross income is omitted from a return. In addition, if no return is filed, the IRS can assess tax any time. If the IRS claims you never filed a return for a particular year, a copy of the signed return will help prove you did.

IRS Recordkeeping Guidelines

You must keep records, such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit appearing on a return as long as they may become material in the administration of any provision of the Internal Revenue Code, which generally will be until the period of limitations expires for that return.

Period of limitations for assessment of tax:

3 years – For assessment of tax you owe, this period is generally 3 years from the date you filed the return. Returns filed before the due date are generally treated as filed on the due date.

No limit – There’s no period of limitations to assess tax when you file a fraudulent return or when you don’t file a return.

6 years – If you don’t report income that you should have reported, and it’s more than 25% of the gross income shown on the return, or it’s attributable to foreign financial assets and is more than $5,000, the time to assess tax is 6 years from the date you filed the return.

Period of limitations for refund claims:

The later of 3 years or 2 years after tax was paid – For filing a claim for credit or refund, the period to make the claim is 3 years from the date you filed the original return or 2 years from the date the tax was paid, whichever is later. If no return was filed, the period to file a claim is 2 years from the date the tax was paid.

7 years – For filing a claim for an overpayment resulting from a bad debt deduction or a loss from worthless securities, the time to make the claim is 7 years from when the return was due.

Guidance on recordkeeping for carryovers

The IRS provides specific guidance on recordkeeping for carryovers, such as Net Operating Losses (NOLs), capital losses, and tax credits. Per IRS Publication 583 and other related guidance, you must retain records that verify these carryovers for as long as they may affect the current or future tax return. This is because the IRS can examine the original year of the carryover, even if it falls outside the typical 3-year statute of limitations (or 6 years in cases of substantial understatements), to verify the accuracy of the carryover amount.

The IRS specifically states in Publication 552, “Recordkeeping for Individuals”, that you should keep records for carryovers until the statute of limitations expires for the tax year in which you use the carryover.

For example:
If you have a Net Operating Loss originating in 2020 and you carry it forward to 2023, you should keep your 2020 records until the statute of limitations expires for your 2023 return, generally 3 years after filing, or longer if extended due to adjustments.

For more details, refer to IRS Publication 552.

Property-related and investment records

The tax consequences of a transaction that occurs this year may depend on events that happened years or even decades ago. For example, suppose you bought your home in 2009, made capital improvements in 2016 and sold it this year. To determine the tax consequences of the sale, you must know your basis in the home — your original cost, plus later capital improvements. If you’re audited, you may have to produce records related to the purchase in 2009 and the capital improvements in 2016 to prove what your basis is. Therefore, those records should be kept until at least six years after filing your return for the year of sale.

Retain all records related to home purchases and improvements even if you expect your gain to be covered by the home-sale exclusion, which can be up to $500,000 for joint return filers. You’ll still need to prove the amount of your basis if the IRS inquires. Plus, there’s no telling what the home will be worth when it’s sold, and there’s no guarantee the home-sale exclusion will still be available in the future.

Other considerations apply to property that’s likely to be bought and sold — for example, stock or shares in a mutual fund. Remember that if you reinvest dividends to buy additional shares, each reinvestment is a separate purchase.

Duplicate records in a divorce or separation

If you separate or divorce, be sure you have access to tax records affecting you that your spouse keeps. Or better yet, make copies of the records since access to them may be difficult. Copies of all joint returns filed and supporting records are important because both spouses are liable for tax on a joint return, and a deficiency may be asserted against either spouse. Other important records to retain include agreements or decrees over custody of children and any agreement about who is entitled to claim them as dependents.

Protect your records from loss

To safeguard records against theft, fire or another disaster, consider keeping essential papers in a safe deposit box or other safe place outside your home. In addition, consider keeping copies in a single, easily accessible location so that you can grab them if you must leave your home in an emergency. You can also scan or photograph documents and keep encrypted copies in secure cloud storage so you can retrieve them quickly if they’re needed.

Carolyn Halverson, EA and Senior Accountant comments,

“Retaining accurate and complete tax records is not just about compliance; it’s about protecting your financial future. Your tax returns and supporting documentation serve as critical evidence in the event of an IRS audit and help establish the cost basis of your investments and property. While the IRS generally has three years to assess additional taxes, certain circumstances, such as substantial income omissions or property sales, can extend the record-keeping requirement. Safeguard your records by using a combination of physical, secure storage, and encrypted digital solutions to ensure they’re accessible when needed.”

TAX PLANNING & PREPARATION