Good records exist for two reasons: so tax prep is fast instead of a reconstruction project, and so you have an answer ready if the IRS ever asks a question about a return you already filed.
General retention guidance
The IRS generally has three years from when a return was filed to assess additional tax, which is why three years is the number most often quoted. But that period extends to six years if income was substantially understated, and there is no limit at all for a return that was never filed or was fraudulent. Keeping records for at least seven years is the common practical standard, longer for anything tied to a business asset.
What to keep
- Income records: invoices, sales records, 1099s and W-2s received.
- Expense records: receipts, bills, bank and credit card statements.
- Payroll records: for as long as employment tax records are required, generally at least four years after the tax becomes due or is paid.
- Records tied to an asset (equipment, property, a vehicle) for as long as you own it, plus the retention period afterward, since they set the basis for depreciation and any eventual gain or loss.
Digital is fine
The IRS accepts digital records as long as they are a complete and accurate reproduction of the original and can be produced when asked. A photographed receipt that is legible is generally acceptable; a photographed receipt that has faded past reading is not.