By David S. Jones, Senior Editor, Real Estate Center at Texas A&M University

COLLEGE STATION, Tex. (Real Estate Center) – Some people never throw tax records away. Others do not keep them long enough.

Knowing what to hang on to, why certain records are needed and how long they should be saved can save storage space and prevent problems should you be audited by the Internal Revenue Service (IRS).

“There are tax and nontax reasons for keeping records,” says Dr. Jerrold Stern, professor of accounting in the Kelley School of Business at Indiana University. “For tax purposes, income sources and amounts need to be identified through W-2 wage statements, 1099 forms — interest income, mutual fund income and stock transactions — and other documentation.”

Writing in the January issue of Tierra Grande magazine, the quarterly magazine from the Real Estate Center at Texas A&M University, Stern notes that records also may be needed for insurance purposes or to obtain a loan.

“Expenses need to be documented to support deductions in the event of an IRS audit,” says Stern, also a Center research fellow. “Documentation can be in the form of a cash receipt, credit card statement or cancelled check. Interest and penalties may be levied if deductions are disallowed for lack of records.”

Keeping tax records is helpful to guide the preparation of future tax returns and for filing an amended tax return, he says. The IRS can furnish copies of prior-year tax returns if necessary.

“Records associated with tax returns should be kept at least until the statute of limitations runs out,” writes Stern. “The statute of limitations is the time during which the IRS is allowed to audit a tax return.”

                                                             Statutes of Limitations
IF   you….

THEN the period is….

1. Owe additional tax and   (2), (3), (4) and (5) do not apply to you

3 years

2. Do not report income   that you should and it is more than 25%

of   the gross income shown on your return

6 years

3. File a fraudulent return

No Limit

4. Do not file a return

No Limit

5. File a claim for a loss   from worthless securities

7 years

Source: IRS Publication 552   – Recordkeeping for Individuals  


“For most people, tax records other than those pertaining to assets, such as real estate and securities, could be discarded after three years,” says Stern. “Even so, a longer period — seven or more years — is prudent.”

Stern’s complete article, “For the Record: When to Toss Old Tax Records,” is available online at the Real Estate Center’s website.