To Retain Records, or Not to Retain, That is the Question.
Dear Accounting Professor:
What are my obligations for retaining records related to my tax returns? I want to dispose of them as soon as possible and do not perceive a need to retain them after I have filed my tax returns.
Thank you for your question. Since I do not know where you reside and your obligations to file tax returns with any particular country, I cannot provide a response that is more specific to your set of circumstances. With this in mind, I will assume that you have an obligation to file income tax returns in the United States and are a taxpayer who is not self-employed. If this is indeed correct, then you have a legal obligation according the federal tax code (Title 26 of the US Code) to retain all of your records for at least three fiscal years after the later of your actual filing date or the end of the regular filing season. For state income tax returns, the requirements range from three to five fiscal years after the later of your actual filing date or the end of the regular filing season. I recommend that U.S. taxpayers retain their records for at least two fiscal years after those dates expire in case a tax authority calls the return in to question at the end of the statute of limitations and the taxpayer was unaware because the postal service lost the notice.
Additionally, certain circumstances (such as a failure to file a return... even if not required to do so) may extend the record retention requirements for that year's returns and every one after that to indefinitely. This means that your record retention obligations are indefinite.
Which records do you need to retain? You should retain all records that relate to your tax returns and support the transactions that took place during a tax year. To make this easy, I recommend that you retain receipts, credit card statements, bank statements, loan statements, etc. in addition to your tax specific documents (W-2, 1099, 1098, etc.). In the event of an audit, the tax authorities will want to see all of the documentation that relates to their inquiries. Failure to have such documentation may have very negative and severe legal and/or financial consequences. (This is particularly true if you have not yet filed a set of annual returns and are required to do so.)
I recommend that you retain copies of your W-2s for all years (even if the tax rules no longer require them) until you have started drawing your Social Security benefits. If your Social Security benefits record is missing a year or has an incorrect year of earnings, you can resolve this by showing the Social Security Administration your W-2 for the matter in question. Self-employment income has to be corrected within three fiscal years (starting at the end of the regular filing season) and the self-employment taxes have to be paid in that same time period or the Social Security Administration is not obligated to give you credit for those earnings on your benefits statement. (You can create your free account at https://www.ssa.gov/ so you can review your Social Security benefits record whenever you desire.)
If in doubt, it is always better to retain your records than it is to dispose of them. Sometimes, we have a need to retain our records that are not mandated by the tax code (such as the Social Security benefits scenario described above) and we are unaware of the value or obligation to do so.