According to the IRS

The IRS does not tell you how to organize and file your records.  But in its Publication 552 on Recordkeeping for Individuals it states that you should “keep them in a manner that allows you and the IRS to determine your correct tax”.

As far as how long to keep records, according to the IRS, “You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out.”

The period of limitations is the time in which you can file an amended return, or the IRS can review or audit your return and assess additional tax.  If we set aside the fact that the period of limitations is unlimited in the case of a fraudulent return, or when a return is not filed at all, the general period of limitations is 3 years if you owe additional tax, or the later of 3 years or 2 years after the tax was paid if you file a claim for a credit or refund after you filed your return.

If you do not report income that you should and it is more than 25% of the gross income shown on your return, you need to keep your records for 6 years, and if you file a claim for a loss from worthless securities, you should keep your records for 7 years.

Basis of Your Home and Other Property

There are some basic records that you will need to keep longer.  These include records for determining the basis of your home and other property.  You should keep these records until the period of limitations expires for the year in which you sell or otherwise dispose of the property.

Also, if you have a home-based business or you rent out part of your home, you will need to know the basis of your home in order to calculate depreciation.  Documentation showing the cost of the equipment and assets you use in your home-based business should also be kept for depreciation purposes, and to calculate any gain or loss on their sale or disposal.

The records you keep for your home should should show the purchase price, settlement or closing costs, and the cost of any improvements.  They should also show any casualty losses deducted and insurance reimbursements received. 

If you receive property in a nontaxable exchange, your basis of the property you receive is generally the same as the basis of the property you gave up.  You should keep records on the old property, as well as the new property, until the period of limitations expires for the year in which you sell or dispose of the new property.

Depreciation Calculations

You should keep a copy of your calculations of depreciation on your home, the improvements you have made, and on any other assets, such as rental property, with your tax return for the year, to support the amounts reported as depreciation expense.  You should also keep a copy of these depreciation calculations in your files for supporting the basis of your home and other assets, in order to carry forward the accumulated depreciation and adjusted basis from one year to the next, so that you will be able to determine the property’s adjusted basis at the time of selling your home, or selling or otherwise disposing of other assets.

Investments

Your records for investments such as stocks, bonds, and mutual funds, should enable you to determine your basis in an investment and whether you have a gain or loss when you sell it.  Keep your brokerage statements and documentation of any reinvested dividends, stock splits and dividends, load charges, and original issue discount (OID).

How to File Records

You may want to keep your income tax records in a separate file, for easier reference.  This will keep everything together for easy access in the event a question arises with respect to your return, if you are subject to an audit or review, or if you need a copy of your tax records to take out a loan, start a business, or for other purposes.  And, when you start doing next year’s return, you will have the prior year’s return to refer to.

Records that support the amounts reported on your return should be filed together with your copy of your income tax return.  When you prepare your tax return, you will need to organize your records, receipts, and other documentation in order to calculate the corresponding amounts to be reported.  You may want to file these records in the same manner, grouped according to how they are reported.

You can keep your copy of each year’s return together with all the receipts, statements, worksheets, calculations, and other documentation grouped together and organized to support each individual item as reported on your return.  You may want to keep an envelope for all records related to a particular item, or it may be sufficient to have a single file folder or envelope per year.    For example, you will need to keep a copy of your tax return together with copies of your W-2, 1099’s, and any other evidence of your income, and receipts and documentation of your deductible expenses.

Other documents, necessary for income tax purposes, also serve other purposes, such as the closing statement on the purchase of your home.  These types of documents will probably form part of your more permanent personal financial records.  You may want to include a photocopy of these records in your income tax return file, or if you just need certain data from those records, you may want to have a cross-referencing system to be able to locate the documents that support your tax return data.

Annual Records

Copies of Tax Returns and Schedules

Keep copies of your annual income tax returns and schedules by year.  If you file electronically, you should print out and/or save an electronic copy of your return.  Normally as part of the e-filing process, once you have finished preparing your return, you will be given the option to print out or save a copy of the return.  You should also keep a copy of the acknowledgement of receipt of your return by the IRS, which comes in the form of an e-mail to you.

Keep copies of your W-2s and 1099s as evidence of federal income tax withheld, and copies of Forms 1040-ES if you made estimated tax payments.  If you have to pay tax with your return, keep a copy of the cancelled check, credit or debit card voucher, or confirmation of electronic funds transfer.  If you received a refund, keep a copy of the check, or confirmation of direct deposit to your bank account.

Requesting a Copy of Your Return from the IRS

If you need a copy of your tax return, you can request it from the IRS by filing Form 4506, Request for Copy of Tax Return.  This form can be downloaded from the IRS website.  The IRS will send you a complete copy of your return, along with copies of your W-2 Forms for that year.  There is a fee for this copy.  You can request copies of returns for the current year and the past 6 years.

Requesting a Transcript from the IRS

If you don’t necessarily need a copy of the whole return, but need information from the return, you can request a transcript, which shows most line items on the return as it was filed, including items on accompanying forms and schedules.  In most cases, a transcript will meet the requirements for lending institutions, for example, for purposes of verifying your income.  You can request a transcript by filing Form 4506-T, Request for Transcript of Tax Return.  There is no charge for this service.  Transcripts are generally available for the current year and the past 3 years.

IRS Worksheets

The IRS Instructions and Publications contain various different worksheets that are used to calculate different amounts reported on your tax return.  You should keep a copy of any of these worksheets that apply to you and that you complete.  They should be kept with your tax return for the applicable year.

• Worksheet for the cost of keeping up a home (to determine if you qualify as Head of Household)
• Worksheet for determing support (to determine how much of a person's support you provided, to see if you can claim that person as a dependent)
• State and Local Income Tax Refund Worksheet (to see if you need to include a refund in your taxable income)
• Worksheet for figuring the cost of group-term life insurance to include in income (if you have group-term life insurance coverage of over $50,000 provided by your employer)
• Worksheet for Figuring the Limit on Rental Deductions for a Dwelling Unit Used as a Home
• Social Security Benefits Worksheet (to determine if any of your benefits are taxable)
• Simplified Method Worksheet (to determine the taxable amount of pensions and annuities received)
• Qualified Dividends and Capital Gain Tax Worksheet
• IRA Deduction Worksheet
• Worksheets for figuring your Modified Adjusted Gross Income for traditional IRA and Roth IRA purposes
• Student Loan Interest Deduction Worksheet
• Tuition and Fees Deduction Worksheet
• Self-Employed Health Insurance Deduction Worksheet
• Standard Deduction Worksheet for Dependents
• Itemized Deductions Worksheet
• Schedule D Tax Worksheet
• Deduction for Exemptions Worksheet
• Worksheet To See if You Should Fill in Form 6251 – Alternative Minimum Tax
• Child Tax Credit Worksheet
• Earned Income Credit Worksheet
• Earned Income Credit Eligibility Checklist

Any other separate calculations you make, that are not IRS schedules that you file with your return but that you prepare in order to determine the amounts you report on your return, shcould also be kept with your copy of your tax return for that year.

Documentation of Income

Records that support the income you report each year can be kept in a file together with your copy of your tax return.

• Paycheck stubs or pay statements.  You may want to keep these until you receive your W-2 form, summarizing your compensation for the year.
• W-2 – Wage and Tax Statement.  This is the support for the amount you report on your tax return, and should be filed with your copy of your tax return.  Note:  You may want to keep copies of your W-2’s until retirement or until you begin receiving social security benefits.  This will serve for verification purposes in case any question arises concerning your work record or earnings.  You can review your accumulated earnings and benefits by requesting a Social Security Statement online at the Social Security Administration website.
• Diary of tip income.  Keep your own diary or other record of tip income, or IRS Form 4070A, Employee’s Daily Record of Tips, if you used that form.
• Documentation of awards, bonuses, stock options, and other incentives you received as an employee.  These should be included in your W-2.
• Unemployment compensation statements and Form 1099-G
• 1099 Forms for interest, dividends, capital gain distributions, and other income
• Brokerage statements (to support capital gains and losses)
• Pensions and Annuities.  Keep copies of receipts, or statements of the amounts you receive, and copies of the worksheet in the tax return instructions to figure the taxable part of your pension or annuity.   Copies of these completed worksheets should be kept until you fully recover your contributions to the pension or annuity plan.
• If you are self-employed, your business accounting records will serve as the documentation to prepare the appropriate tax return schedules, such as schedule C or C-EZ, and to support the business income you are reporting.  Self-employed persons should also keep copies of tax returns, with Schedule SE for Self-Employment Tax indefinitely, for social security purposes.
• K-1 schedules for your share of partnership income
• When you sell your home or other asset, your records should show the sales price and any selling expenses, such as commissions.  You will also need to know the adjusted basis of your home or other asset, to determine the gain or loss on the sale.
• Gambling winnings and losses.  Keep a log or other record of your winnings and losses, that show the date and type of gambling activity, name and address or location of the gambling establishment, names of other persons present with you at the gambling establishment, and the amount you won or lost.
• Credit card statements and receipts, and confirmations and statements of electronic funds transfers for any other income you received.

Documentation of Expenses for Tax Deductions and Credits

In general, you should keep in your files your proof of payment, including receipts for cash payments, bank statements and cancelled checks, credit and debit card statements and receipts, and confirmations and statements of electronic funds transfers.

You may want to group receipts together by category, to support the individual amounts reported on your return.  Bank statements, and credit and debit card statements may support more than one type of expenses.  These statements can be kept in a general file of support for expenses for the year.  If you keep your statements in another personal finance file, include a copy, or make a cross-reference to those statements in your income tax file.

In addition to your bank and credit or debit card statements, and your receipts and other proof of payment, the following are some of the other records you should keep in your annual income tax files to support your deductible adjustments, expenses and credits.

Adjustments to Income:

• Individual Retirement Arrangements
  • Documentation of contributions made during the year
  • Statements of your IRA account
  • Form 5498, IRA Contribution Information for each year showing contributions you made, distributions you received, and the value of your IRA(s)
• Moving expenses
  • Moving expense reports you submit to your employer
  • Documentation of reimbursement from your employer
• Education-related adjustments
  • Form 1098-E, Student Loan Interest
  • Tuition and fees statements
  • Financial aid award statements

Itemized Deductions

• Medical and dental expenses
  • Medical records and prescriptions
  • Statements from doctors, hospitals, clinics, and other health care providers
  • Documentation of insurance reimbursements
  • Log or diary of your actual transportation expenses or a log of your mileage
  • If you paid qualified medical expenses with a distribution from a Health Savings Account (HSA) or Medical Savings Account (MSA), keep a record of the name and address of each person you paid and the amount and date of the payment.
• Taxes
  • W-2 forms and 1099-R showing state income tax withheld from your wages or pensions
  • Copies of state and local income tax returns and estimated state income tax payment forms
  • Form 1099-G if you received a refund of state income taxes
  • Mortgage payment statements or vouchers (for real estate taxes)
  • Copy of closing statement on the purchase or sale of your home (for accrued real estate taxes)
  • Property tax assessments and proof of payment
  • If you deducted actual state and local general sales taxes instead of using the optional state sales tax tables, you must keep your actual receipts showing general sales taxes paid.
• Interest expense
  • Mortgage payment statements or vouchers (for interest expense)
  • Form 1098, Mortgage Interest Statement
• Contributions
  • Receipts from charitable organizations showing its name and the date and amount of the contribution
  • Written acknowledgment of your contribution from the organization if you donate cash of $250 or more
  • Written statement from the charitable organization for contributions from which you benefit, that are more than $75 and are partly for goods or services
  • Written acknowledgement of your contribution from the organization if you donate a car, boat, or aircraft
  • Records (diary or log) of your out-of-pocket expenses when you perform volunteer services for a charitable organization
  • Diary or log of actual transportation expenses or a log of your mileage
  • For donations of property, a a receipt from the organization showing its name, the date and location of the contribution, and a reasonably detailed description of the property
  • Reliable records (appraisals) of the fair market value of the property at the time of the contribution, the cost or other basis of the property, and the terms of any conditions attached to the contribution
• Nonbusiness casualty and theft losses
  • Insurance company adjuster’s report or a police report that show the type of casualty (car accident, fire, storm, etc), and that the loss was a direct result of the casualty
  • Titles to the property, showing you are the owner
  • Appraisals showing the decrease in the fair market value of the property due to the casualty
  • Copies of insurance claim forms and reimbursements
• Employee business expenses
  • Diary or log of business expenses
  • Copies of expense reports submitted to your employer
  • Records of reimbursements or allowance (such as per diems) received from your employer
• Miscellaneous deductions
  • Paycheck stubs or pay statements showing deductions for union dues or other deductible work-related expenses
  • Diary or log of job-hunting expenses
  • Documentation of investment expenses
  • Schedule K-1 for partnership expenses you can deduct

If you have a home-based business, keep a copy of the calculation you make to determine the percentage of business use of your home.  Keep copies of your bills and statements of general household expenses such as utilities, and copies of your depreciation calculations on your home and on assets you use in your home-based business.

Permanent or Long-term Records

Your permanent or long-term records will include documentation that enables you to determine the basis of your home and other assets, and your investments.  These records should include:

• Closing or settlement statement on the purchase of a home or other property
• Property titles and deeds
• Mortgage records
• Loan agreements
• Appraisals
• Records of any home improvements you have made
• Tax assessments
• Depreciation calculations
• Brokerage statements (for basis of investments in securities, mutual funds)

There are personal records that you need to keep indefinitely for a variety of purposes, including income tax:

• Birth certificates, for you, your spouse, and dependents
• Social Security cards
• Immigration and naturalization records
• Military discharge papers
• Marriage certificate
• Copy of your written separation agreement or the divorce, separate maintenance, or support decree, for purposes of corroborating your filing status and, if you pay or receive alimony, to support your deduction or your income
• If you are claiming an exemption for a person under a multiple support agreement, you need to keep a copy of the signed statement from all other eligible individuals who could have claimed the exemption.
• Child Care Credit - You will need the name, address, and taxpayer identification number for all persons or organizations that provide care for your child or dependent. You can use Form W-10, to get the information from the care provider.
• If you are disabled and under age 65, a statement from a physician certifying that you were permanently and totally disabled on the date you retired
• For disabled Veterans, Form 21-0172, Certification of Permanent and Total Disability, issued by the Department of Veterans Affairs (This replaces the physician’s statement of disability.)
• Individual Retirement Arrangements (IRAs)
  • Keep copies of the following forms and records until all distributions are made from your IRA(s).
  • Form 5498, IRA Contribution Information, or similar statement received for each year showing contributions you made, distributions you received, and the value of your IRA(s)
  • Form 1099-R, Distribution From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., received for each year you received a distribution.
  • Form 8606, Nondeductible IRAs, for each year you made a nondeductible contribution to your IRA or received distributions from an IRA if you ever made nondeductible contributions.
• Documentation of your affiliation with a retirement plan
• Documentation of the legal formation of a business, if you are an owner or partner, such as articles of incorporation, partnership by-laws, state and local registration

Using Software to Keep Track of Personal Finances

If you keep track of your personal finances using computer software packages, you still need to keep documentation substantiating the entries made in that software.  You will also want to have adequate backup for your computer files or programs.  If you have a home-based business or you are the owner of a small business, you should consider having an offsite contingency plan for recovery in the event of a power outage or computer breakdown.

Discarding Records that are no Longer Needed

When you decide it is no longer necessary to keep certain paperwork, it should be shredded before discarding it, to protect credit card numbers, bank account numbers, and personal privacy.

Summary

• Keep a separate file of your tax returns, for at least 3 years, together with all the records that specifically support the items you report on each annual tax return.
• Don’t forget to keep worksheets and other calculations.
• Keep longer-term records that support the basis of your home, other assets and investments.
• Keep a permanent file of records that you will need for income tax and other purposes on an ongoing basis.
• In your income tax file, include copies of records you keep in other files that also serve to support items you report on your tax return, or make a notation or cross-reference to be able to identify and locate these records when needed for income tax purposes.
• Back up your computer records.
• Destroy personal documents once they are no longer needed, to protect your privacy and identity.