Everyone must keep records that substantiate their tax returns or other important life events for as long as necessary. So, what does this mean, and what records do I need to keep?

What records do I need to keep?

The retention period for federal tax return substantiation is generally three years from the later of the tax return filing due date or the actual filing date. However, federal recordkeeping guidelines could become more extended. Federal guidelines for record retention are generally three years. However, errors on your tax return for more than 25% of the tax obligation require record retention of six years. If there is fraud, the record-holding period is indefinite.

State guidelines could be different. Understand your state and local audit timelines. Often, states can review tax returns after your federal return is officially closed to a potential audit. When in doubt, figure six months to a year after your federal tax filing retention period.

Keep receipts for valuable items and records of other items purchased, including jewelry and other collectibles. You will need this to substantiate any gains or losses when you sell the item. You also have to save digital asset documents. If you buy or sell cryptocurrency, you must retain all related documents confirming the purchase date, sales date, and cost.

Finding the cost of stocks is easier…and trickier. Stock and investment companies must now report the cost of their investments to the IRS. So, you will not need to dig around for old transaction information to prove what you paid for your investment. On the other hand, any errors on your investment statement also go to the IRS, so make sure the information you provide is correct, or it may create an audit trigger.

How long should I keep them?

Some items should be kept indefinitely. These include, but are not limited to:

• Copies of your 1040 tax return
• Major asset purchases and sales
  • Home mortgage
  • Home closing documents
  • Documentation for stock and investment transactions
  • Major asset purchases and sales documents
  • Insurance documentation
  • Birth/death/marriage certificates
• Other essential documents.

Others may want your documentation. You may need records for non-tax-related purposes. Copies of divorce decrees, records of insurance, and home sales closing paperwork are typical examples of necessary documents for other reasons. Contact our RRBB advisors if you have any questions.