Quick overview

Keeping the right records for the right length of time is a simple way to reduce audit risk and protect tax benefits you’ve already claimed. The IRS sets general retention timelines, but specific situations—like large omissions, worthless securities, or property transactions—extend how long you should keep files. In my 15 years preparing returns and defending clients in audits, I’ve seen poor recordkeeping turn manageable issues into costly disputes. Below I explain the standard rules, when to keep records longer, practical systems to manage files, and authoritative sources to confirm the rules.

Core retention timelines (what to keep and for how long)

The IRS provides general guidance on recordkeeping and how long to keep records (see IRS Recordkeeping). Use this as a baseline, then adjust for exceptions listed below.

  • Individual tax returns and supporting documents: keep for at least three years from the date you filed the return or the due date of the return, whichever is later. This aligns with the IRS’s general statute of limitations for most audits (IRS: Recordkeeping).
  • If you underreport income by more than 25%: keep records for six years. This longer period matches the extended statute of limitations for substantial omissions.
  • Claims for loss from worthless securities or bad debts: keep records for seven years.
  • Property records (purchase price, cost basis, improvements, depreciation schedules): keep as long as you own the property plus three years after the sale to support capital gain or loss and to calculate allowable depreciation.
  • Employment tax records: keep for at least four years after the date the tax becomes due or is paid (whichever is later).
  • No return filed or a claim of fraud: retain records indefinitely until the situation is resolved—there is no statute of limitations where fraud or failure to file is involved.

Table: Common document types and recommended retention

Document type Recommended retention
Individual tax returns (Form 1040) and supporting receipts 3 years
Business tax returns and supporting business records 7 years (common practice to keep 6–7 years for added protection)
Property purchase, improvement, and depreciation records As long as you own the property + 3 years after sale
Employment/payroll tax records 4 years after tax due or paid
Records for claims underreporting >25% 6 years
Worthless securities / bad debt claims 7 years

(These time frames reflect IRS guidance as of 2025—see authoritative sources at the end.)

Exceptions and special situations

  • Fraud or no return: The IRS can assess tax at any time, so keep records indefinitely while an issue is open. If your return was fraudulent or you didn’t file, statutes of limitation generally do not apply.
  • Loss claims, casualty events, casualty losses, and carryforwards: keep documents supporting loss amounts and tax attributes for the life of the carryforward plus retention period because these items can affect future tax years.
  • Self-employed or small-business owners: you may need longer retention for payroll, employment tax, and asset records because state agencies and the Department of Labor may have separate requirements.

Digital records: what the IRS accepts and best practices

The IRS accepts electronically stored records if they’re accurate, readable, and retrievable. Electronic copies are valid substitutes for paper records when they meet the IRS standards for accessibility and integrity (see IRS guidance and acceptable ESI practices). I regularly recommend keeping both a cloud backup and a local encrypted copy, and using file naming conventions and folders by year and tax type to speed retrieval during audits.

Practical digital tips:

  • Save documents as searchable PDFs and use consistent file names (e.g., 2024W2EmployerName.pdf).
  • Store raw data (CSV or ledger exports) in addition to receipts—spreadsheets provide an audit trail for calculations.
  • Keep checksums or digital signatures if you rely on long-term electronic records for major asset basis determinations.

For detailed technical guidance on formats and electronic record acceptance, see our article on Electronic Records the IRS Accepts for Audit Support.

How I organize client files (practical system)

In my practice I recommend a three-layer approach:

  1. Year folder: one folder per tax year with subfolders for Income, Deductions, Credits, Property, and Correspondence.
  2. Permanent records folder: items you keep indefinitely (e.g., home purchase records, certain carryforwards, and basis worksheets).
  3. Archive and purge schedule: inventory files annually and purge only after the retention period expires; shred sensitive paper documents and securely delete digital copies.

Use this checklist when closing a tax year:

  • Reconcile bank and brokerage statements to tax forms.
  • Save W-2s, 1099s, K-1s, mortgage interest statements, property tax receipts, and charity acknowledgments.
  • Archive items that create basis for assets.

Real-world examples (lessons from practice)

Example 1: A small business owner threw out five-year-old receipts and later faced a six-year audit inquiry after the IRS adjusted reported income. Without purchase invoices, substantiating COGS (cost of goods sold) became difficult and the owner paid more tax than if the records had been retained.

Example 2: A taxpayer sold a rental property and did not keep improvement invoices. The lack of proof for capital improvements raised taxable gain—the tax increased until they could reconstruct basis from old bank records and contractor statements.

These examples show that retaining evidence of deductions and basis for the full applicable period can materially change audit outcomes.

Common mistakes and misconceptions

  • Mistake: Keeping nothing after filing. Filing a return does not mean you can discard all supporting documents. The IRS may select returns for review within the statute of limitations.
  • Mistake: Relying on a single backup method. A local hard drive can fail; use at least two independent backups (cloud + offline encrypted copy).
  • Misconception: Paper is always superior to digital. Digital copies that meet IRS standards are perfectly acceptable, and in many cases easier to search.

State rules and other agencies

Remember state tax agencies, lenders, and benefit programs may have different retention requirements (for example, state sales tax audits or unemployment insurance audits). When in doubt, keep business and payroll records for a longer period and confirm state-specific timelines with your state tax agency.

How to reconstruct lost records

If a document is missing, you can often obtain substitutes:

  • Request transcripts from the IRS (wage and income transcripts show W-2/1099 data).
  • Ask employers, banks, brokers, or charities for duplicate statements or letters.
  • Recreate a contemporaneous record (a signed, dated memo describing the transaction) and support it with corroborating evidence such as bank withdrawals, calendar entries, or emails.

See our guide on obtaining IRS transcripts and reconciling records for step-by-step methods to reconstruct past tax information: Using IRS Transcripts to Reconcile and Correct Your Tax Records.

Practical retention policy you can adopt today

  • Keep routine personal tax records for 3 years.
  • Keep business and property-related records for 6–7 years where applicable.
  • Keep permanent records (property basis, estate documents, retirement plan records) indefinitely or until no longer relevant.
  • Automate backups and run an annual file review to purge expired items safely.

When to consult a professional

If you face an audit, need to reconstruct basis for sold property, or have complex carryforwards (e.g., NOLs, capital loss carryovers), get a tax professional involved early. In my audits I often find timely documentation or reconstructed records that materially reduce proposed adjustments when provided quickly.

Frequently asked questions

Q: Is three years always safe? A: It’s the general rule, but you may need longer if you underreported income significantly, claimed certain losses, or hold property with carryforwards.

Q: Can I scan and throw out paper receipts? A: Yes—if the images are clear, searchable, and backed up. Keep originals for a short period if the item is material until you confirm the scan is usable.

Q: How do I handle receipts for small cash purchases? A: Keep a contemporaneous log and any supporting evidence. For small purchases, consistent documentation (dates, amounts, purpose) is crucial.

Authoritative sources

  • IRS, “Recordkeeping” (Recordkeeping for small businesses and individuals): https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping
  • IRS instructions and statutes on limitations and proof of basis: refer to IRS guidance on “How long to keep records.” (See IRS Recordkeeping pages.)
  • Consumer Financial Protection Bureau: guidance on record retention for financial documents and security best practices.

Disclaimer

This article is educational and does not substitute for personalized tax advice. Rules can vary by state and change over time—consult a qualified tax professional or the IRS website for decisions affecting your particular situation.

Related FinHelp resources

If you want, I can convert this into a printable checklist or provide a sample folder structure and file-naming convention template for your specific situation.