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The Importance of Maintaining Records
You can file correct, comprehensive tax returns with little difficulty and get your refund as soon as possible if you keep reliable records. One of the most frequent causes of taxpayers missing the filing deadline is rushing to gather necessary records at the last minute. If you file after the deadline, you may incur IRS fines and have to wait a lot longer for your refund. There are often quite precise recordkeeping requirements for tax benefits.
Due to their failure to maintain the required documentation, many taxpayers lose out on important credits and deductions. View the Types of Documents I Require. and Documents Needed for Particular Tax Advantages below for additional details.
Additionally, the IRS can inquire about your tax return or ask for additional details on your sources of income, deductions, etc. Full records will help you immediately answer these demands and defend all the numbers on your return. The IRS may impose additional taxes and/or penalties if you are unable to produce the necessary documentation. To put it briefly, maintaining accurate records helps you avoid any potential IRS issues and get all the tax benefits you have the right to.
Also, you might need your records for non-tax reasons
Beyond tax issues, there are also other justifications for keeping thorough records. First off, keeping an accurate track of your income and expenses will help you save away a little extra money each month and build and adhere to a realistic household budget.
Additionally, you could be required to keep records for a specific property by lenders and insurance agencies. You might need to keep your records for longer than the IRS mandates for these reasons. As a result, you should always confirm that you won’t need any tax records before throwing them away.
How much time should I spend keeping tax records?
Generally speaking, the IRS mandates that you maintain a copy of your tax return and all related worksheets, forms, and records for the duration of any potential extra tax, interest, or penalty assessments. Additionally, you should hold onto these records for as long as you have the chance to:
Time Limitation
Generally speaking, the time limit for updating your return and/or requesting a credit or refund overlaps with the time for the IRS to levy extra taxes or fees if you file your return and pay any taxes owed by the filing date. The period of limits is the name given to this time range.
For an individual tax return that was timely submitted, the normal statute of limitations is three years from the return’s initial due date. The statute of limitations for late-filed returns usually lasts for three years after the IRS accepts the return for processing.
Retaining your tax return and related documents for three years after the initial filing deadline or the date the IRS received your return, whichever came first, is therefore often adequate.
Table 1: IRS Actions’ Statute of Limitations in Different Circumstances
| Situation | Standard Period of Limitations for IRS Actions |
| 1. Tax return filed; none of the below circumstances apply. | 3 years |
| 2. Taxpayer does not report significant income on return | 6 years |
| 3. Taxpayer files a fraudulent return | Unlimited |
| 4. Taxpayer does not file a return | Unlimited |
| 5. Taxpayer claims a loss from worthless securities | 7 years |
What Happens If I Pay My Taxes and File My Return at Different Times?
If you pay your taxes at a different time than when you file your return, the time limit for amending your return or claiming a credit or refund is slightly altered.
You can usually do these things in this case up to three years after filing the return, three years after the return’s initial due date, or two years after paying the tax, whichever comes first.
Additional Exclusions from the Three-Year Limitation Period
The IRS’s statute of limitations to levy extra taxes or fees may be increased under a number of circumstances. Keep in mind that these situations generally just impact the statute of limitations for IRS actions not for taxpayer actions. For instance, the IRS has six years to take action if a person fails to declare income that exceeds 25% of the gross income reported on their return.
The IRS has an indefinite amount of time to collect taxes, fines, interest, and other fees from a taxpayer who either files a fraudulent return or fails to file a return at all.
Which Types of Tax Documents Must I Maintain?
Taxpayers are required by the IRS to maintain a wide range of fundamental documents that can be relevant to their taxes. These records can be divided into four major groups.
Earnings: You can accurately report all of your income if you have thorough records of all the payments you get, including dividends, interest, wages, and profits from self-employment. Also, these records assist you in categorizing different forms of income that may be subject to different taxes. For instance, money received as an independent contractor is considered differently from income received as an employee for tax reasons. Interest on municipal bonds is one example of a sort of income that might not be subject to taxes at all.
Expenditures: You may be eligible for a tax credit or deduction for expenses such as health insurance premiums, mortgage interest, conventional IRA contributions, and college tuition. You need to keep records of every expense for all of these tax-saving options. You could be able to deduct a wide range of business expenses if you have business income, including money from gig economy, independent contract, and freelance work. However, this is only possible if you maintain thorough records that clearly separate between business and personal expenses.
FAMILY SIZE, MARITAL STATUS, ETC: Your options for filing taxes depend on your marital status. The standard deduction amount, tax rate, and income limit for certain tax credits and deductions can all be greatly impacted by a change in filing status.
To maintain track of all births and adoptions since the number of eligible children you have may impact your eligibility for the Earned Income Tax Credit, Child Tax Credit, and many other tax advantages. Additionally, document other life transitions, such as moving, becoming disabled, or a family member passing away.
A taxable capital gain or a capital loss that can be used to offset profits for tax purposes can be obtained via selling or disposing of property. Stocks, cryptocurrencies, real estate, furniture, artwork, musical instruments, electronics, and other equipment are examples of common property types that are engaged in capital gains and losses. You must maintain thorough records of the purchase, renovation, sale, exchange, and/or donation of all the property involved in order to accurately compute capital gains and losses.
Particular Guidelines for Property Documents
You can either receive a taxable capital gain or a capital loss that you can use to offset capital gains when you sell assets like stocks, cryptocurrency, furniture, artwork, tools, or equipment. Keep records of all your purchases, improvements, sales, and other disposals of any property that might be worth selling. When you sell or otherwise dispose of the property, keep these records for at least the tax year’s statute of limitations.
Maintaining accurate records is especially crucial if you acquire property through a trade or exchange. For instance, you could exchange your dining room chairs and tables for an entertainment cabinet and sleeper sofa. In this instance, the initial cost of the table and chairs would typically equal your investment (or “basis”) in the sofa and cabinet. Records of your initial purchase of the dining room table and chairs must therefore be kept.
Once more, preserve these documents until the end of the tax year, when you sell or otherwise get rid of the cabinet and sofa.
Acceptable Methods of Expense Proof
Proof of payment must be included in your records for many costs that are eligible for a credit or deduction. In the past, a paper sales receipt, a stamped invoice, or a cancelled check were usually accepted as proof of payment. You can also use the following as proof of your tax-deductible costs in the age of digital payments and receipts:
Table 2: Common Documents to Maintain
| Category | Common Records | Why You Need Them |
| Income |
|
Income is typically the single biggest determining factor for how much tax you owe. Inaccurately reporting income can result in overpayment of tax or IRS penalties. Note that W-2 forms may also be needed to prove your eligibility for Social Security and Medicare benefits. |
| Expenses and Deductions |
|
The IRS requires detailed, written records to support most deductions. If you do not have the needed records, the IRS may disallow your deduction. |
| Marital status/Family size |
|
The IRS may require documents like these to justify your filing status and/or your claims of deductions or credits like the Child Tax Credit, Earned Income Tax Credit, and Child and Dependent Care Credit. |
| Property/Capital gains and losses |
|
Any sale, trade/exchange or other disposal of property may involve a capital gain or loss. Capital gains may be subject to capital gains tax, while some capital losses may be used to offset capital gains or other income, reducing your tax.For your main home, proper record keeping may qualify you to exclude most or all of the gain from selling your home from your income, greatly reducing tax. The IRS has stepped up its enforcement of tax rules for cryptocurrency, so make sure your crypto records are detailed and up to date. |
| Life events |
|
Any of these events could affect your federal, state or local taxes, or qualify you for specific tax benefits. |
Capital Business Expense Depreciation
Long-term business assets, such as furniture, machinery, computer hardware, and equipment, are typically not fully deducted at one time. Instead, over a period known as the asset’s useful life, you usually have to deduct a percentage of the asset’s cost annually. The costs associated with this process are referred to as capital expenses, and the process itself is known as depreciation. Keep thorough records of any capital expenses you depreciate for at least the time frame for the most recent tax return on which you claimed a depreciation deduction. Maintain your records for the whole tax year in which the sale takes place if you want to dispose of an asset, as that transaction may involve a capital gain.
Keeping Personal and Business Expenses Apart
You may be able to deduct business expenditures from your earnings if you have business income, such as money from freelancing, independent contracts, or other gig economy work. You must, however, ensure that professional and personal spending are separated in your records. The IRS can turn down your claim if you are unable to provide clear evidence that a specific expense was made for a business purpose. The acquisition of a new computer is an example of an expense that needs to be properly prorated for both personal and corporate use. For instance, 50% of the computer’s cost may be deducted as a business expense if only half of your computer use is for work-related purposes.
Create written documentation that explains the justification for your stated percentage of commercial use, if at all possible. In a similar vein, you can only deduct the business component of your vehicle expenses if you use your car for both personal and business activities. Only the miles you drive for business purposes should be subject to the normal mileage rate. Divided each expense according to the proportion of miles driven for work-related purposes if you keep track of real car expenses.
Documents Needed for Particular Tax Benefits or Concerns
You might need extremely precise documents to meet IRS regulations in order to address certain tax concerns, such as collecting particular tax credits or deductions. The most typical specific records required for different tax purposes are compiled in this section.
Premium Tax Credit under the Affordable Care Act
You might be eligible to get the Premium Tax Credit if you buy your health insurance through the Insurance Marketplace, also known as the Insurance Exchanges. Form 1095-A from the exchange where you bought your insurance is required.
Alimony
Alimony is often not taxed for the payee or deductible for the payer in divorces or legal separations that take place after 2018. Alimony records for those divorces and separations are therefore not required for tax purposes (but they should be kept for other purposes). You might require your alimony documents for alimony associated with a divorce or legal separation from 2018 or earlier in order to correctly report your income or support a tax deduction.
Credit for Adoption
Maintain thorough documentation of the adoption procedure, including all costs. An adoption taxpayer identification number (ATIN) for the kid may also be required, depending on the adoption’s status at the conclusion of the tax year.
Using Your Car for Business
Maintain thorough mileage records that include the distance travelled and the reason for each journey. You have to keep track of both professional and personal mileage if you also use your car for leisure. Only apply the regular mileage rate to your business miles if you are using it to calculate your deduction. You must provide thorough evidence of payment for every cost if you record real car expenses. Based on the percentage of your mileage that you drove for work, prorate your actual car expenses.
Gains and Losses on Capital
Throughout the statute of limitations for the tax year in which you sell or otherwise dispose of any investments or other property that might have long-term worth, maintain thorough records.
The amount you paid for the property or the value of any products or services you traded for it should be made crystal clear in these documents. When dealing with inherited property, note both the property’s initial value when you acquired it and the prior owner’s stake in it, which is typically the purchase price. Also, keep track of any expenses you incur to make significant improvements to the property and any depreciation claims you make.
Deductions for Charitable Contributions
A written receipt from the eligible charity where you made the donation should be obtained and retained. You might additionally want documentation of the given property’s worth, such a recent appraisal, for non-cash contributions.
Credit for Child and Dependent Care
If you provide daycare for a dependent child under 13 or look after another dependent who has a disability so that you can work or go to school, you might qualify for this credit. Maintain thorough records of all care costs, together with information about the child’s age, the reason you require care services, and any medical diagnoses of total impairment.
Child Tax Credit
Each of your eligible children needs to have a Social Security number (SSN) in order for you to be eligible for the Child Tax Credit (CTC). In addition, you must provide evidence of each child’s age, that they lived with you for the period of time required (often more than half the year), and, in the event of shared custody, that you have an agreement that permits you to claim the child for tax purposes.
Section 529 and Coverdell Education Savings Plans
For as long as the account is open, save written documentation that identifies the account recipient and all of your (and others) contributions to the plan.
Make sure you or the beneficiary maintain thorough records of the reason and amount of each withdrawal after they start utilizing account funds for approved educational costs. Maintain these documents for the final tax year that the account has money in it, or at least until the statute of limitations expires. Keep thorough records of the transaction if the beneficiary transfers money to a Roth IRA.
Honoring the Elderly and Disabled
You must have documentation from a doctor or the Department of Veterans Affairs (VA) proving that you resigned because of a permanent and total disability in order to be eligible for this credit if you are under 65.
NFTs, Cryptocurrency, and Other Digital Resources
You must maintain the same records for digital assets as you would for any other property that may be sold at a profit or loss because the IRS views them as property rather than currency. Specifically, maintain documentation of all cryptocurrency and other digital asset purchases, sells, and exchanges. Keep in mind that even if you owe no tax on transactions involving digital assets, you still need to record any involvement in those transactions on your annual tax return. You will want formal proof of the prior owner’s basis (often the investment they made to purchase the cryptocurrency) if you inherit it. The IRS may tax each dollar you get in exchange for the cryptocurrency as a capital gain if you are unable to provide those records.
Losses from accidents, fatalities, and theft
Certain property losses that take place in regions affected by federally declared disasters are eligible for specific deductions from the IRS. Both unambiguous proof of the property’s value and proof of ownership must be included in your records. Regular documented assessments of valuable goods, such as antiques and artwork, can support your loss claim.
Earned Income Tax Credit
Hold onto all of your earned income documentation, including W-2 and 1099-NEC forms. Since unearned earnings may impact your eligibility for the Earned Income Tax Credit (EITC), keep track of all of your unearned income, including interest and dividends. Social Security numbers (SSNs) for you, your spouse, and any eligible children are also required.
Deduction for Teacher Expenses
Keep track of all the classroom supplies you paid for yourself, including receipts or other documentation of payment. Proof that you put in enough hours as a teacher, classroom assistant, principal, or other qualified educator at a qualifying school may also be required.
Clean Energy and Energy Efficiency Credits for Households and Automobiles
For residential energy efficiency upgrades, renewable energy conversions (such as installing solar panels), and the purchase of plug-ins and other alternative fuel cars, the IRS provides a range of tax credits. Maintain thorough records of all eligible costs, including vehicle identification numbers (VINs), energy efficiency ratings, paid bills, and receipts.
Accounts for medical savings (MSAs) and health savings (HSAs)
Maintain thorough records of every payment you make for approved medical costs. The medical clinic, facility, or practitioner you paid, as well as the type of expense (eye test, dental crown, etc.), should be visible in these records. Keep these documents for as long as possible during the tax year in which you take money out of your MSA or HSA to cover the cost.
Credits and Deductions for Higher Education Expenses
Proof of tuition and fees is required in order to claim the Lifetime Learning Credit (LLC), American Opportunity Tax Credit (AOTC), or the above-the-line deduction for higher education expenses. Typically, collecting Form 1098-T (Tuition Statement) from an accredited higher education institution is part of this procedure.
Deduction for Home Office
The Home Office Deduction may be available to you if you work from home most of the time and earn company revenue. You may also be eligible if you utilize a separate facility on your property, such as a detached garage, exclusively for business operations. You should keep thorough records of all of your deductible expenses, including rent and utilities, as well as evidence of the size of the space you use for business.
IRAs, or individual retirement plans
Maintain thorough records of every IRA donation you make. These documents can demonstrate that you did not beyond the annual contribution cap for any IRA. Contribution records are also needed for regular IRAs in order to support any tax deductions you may be eligible for.
Additionally, maintain documentation of all taxable and non-taxable withdrawals you make from your IRAs.
Exclusion of the Main Home Sale
Selling real estate, such as a home or condo, frequently results in a sizable monetary gain. You might, however, be able to deduct from your income a sizable amount, if not the entire, of the profit from the sale of your primary residence. You must have thorough documentation of your home’s acquisition, renovations, and sale to support your claim of the Home Sale Exclusion. If you received a Form 1099-S in connection with the sale, it should be included in these records.
Itemized Deductions for Medical and Dental Costs
Maintain thorough records of every payment you make, noting the type of care received, the clinic, facility, or practitioner you paid, and the details of the transaction. Also, maintain a mileage log as well, as some miles travelled for medical purposes can qualify for a regular mileage rate deduction.
Itemized Mortgage Interest Deduction
Maintain a record of every mortgage payment you make, including the interest amount paid. The lender should provide you with Form 1098, Mortgage Interest Statement if you pay $600 or more in mortgage interest in a given year.
The Saver’s Credit
Contributions to an IRA or other eligible retirement account may qualify middle- and lower-income taxpayers for this benefit. Complete records of all your account contributions and evidence of your income are required in order to qualify for the credit.
Income from Self-Employment and the Gig Economy
For those who work for themselves, recordkeeping can be especially difficult because their earned money frequently comes from a wide range of sources. Maintain thorough records of every payment you receive for goods and services, whether cash or cryptocurrency. Keep in mind that, generally speaking, all earnings from self-employment are taxed, even if you do not receive 1099 forms for specific payments.
Interest deduction for student loans
Even if they do not itemize their deductions, many taxpayers are eligible to claim this deduction. Maintain thorough records of every payment you make on your student loans, including the amount of interest charged.
Local and State Taxes
You might be able to deduct some or all of the taxes you pay to state and local governments if you itemize deductions on your federal tax return. Maintain copies of all state income tax returns, property tax statements, and receipts attesting to sales tax paid.
