Retention of Tax Returns
Even after you have received an income tax refund or have paid any income taxes owed for a particularly year, the Internal Revenue Service may not be done checking the accuracy of your return. So it is in your best interest to keep your tax return for several years after you initially file it.
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Documentation
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The IRS computers check many of the math calculations and some other parts of your return, like income from W-2s, upon receipt. But with the millions of returns that taxpayers file each year, it is usually a year or two before your return will be examined for accuracy of income, including items like dividends and interest, sales of property and sales of stock. So you should keep your returns and supporting documentation until the statute of limitations expire, typically three to seven years, depending on the item.
Different Retention Requirements
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You are generally in compliance if you keep most records three years. If you under-report your income by more than 25 percent, the statute of limitations is six years. The statute of limitations is seven years for claims of a worthless security. There is no statute of limitations, however, if you do not file a return or if you file what the IRS considers to be a fraudulent return. So your best bet is to file your return every year and attempt to be as accurate as possible.
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Retention Method
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The IRS permits the use of electronic records rather then paper records as long as the electronic storage system that you use can store, retrieve and reproduce your records in a readable format. The electronic storage system must contain complete and accurate information.
Additional Resource
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If you have not kept your tax return and you need it for an IRS audit, to obtain a loan or for some other purpose, you should be able to obtain a tax return transcript from the IRS. You can order one by phone or by mail at no charge. A tax return transcript shows most information from your return as it was originally filed. A tax account transcript shows any adjustments you made after you filed your initial return. So ask for a tax account transcript if you have made any changes.
Caution
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Even after the the IRS is done with your tax records, you might need them to obtain a loan or for other insurance purposes. The older the return, the less likely you will need it for any reason. Unless you have filed fraudulently or have failed to file, you are highly unlikely to need tax records for more than seven years.
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References
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