If you're not sure which tax documents to keep and which ones to drop in the shredder, you're not alone. Even the experts disagree. In fact, there are two basic schools of thought on this, and both seem to relate to the IRS' statute of limitations for auditing your tax returns. One school says keep tax returns and accompanying paperwork, including W-2 forms, 1099 forms, other tax reporting statements and end-of-year bank statements that show interest earned, for 3 years. The other claims that holding onto these documents for up to 10 years is the safest bet.
For assessment of additional taxes by the IRS, or if you intend to claim additional refunds, the statute of limitations is generally three years from the date you file your return. However, if you fail to report all of your income and the under-reported figure is more than 25% of the gross income provided on your return, the IRS has six years to audit your returns. Additionally, if you claimed a loss on certain securities, the statute of limitations is seven years. Of course, there is no limitation if you filed a fraudulent return or if you didn't file a return at all. With this in mind, consider keeping your tax returns and relevant documents for a minimum of 7 years.
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