How long should you keep old tax return files?

For federal income taxes, the Statute of Limitations (SOL) is generally three years from the date of filing any required return. If the required return was not filed, there is no statute of limitations and the required records must be kept forever. There is also no statute of limitations on fraudulent returns or willful attempt to evade taxes. (If a return is filed before the due date, the three year period begins on the due date.)

Internal Revenue Code Section 6501(e)(1)(A) extends the normal three year period to six years "if the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return." So it would be prudent to keep your records for at least six years so you can defend yourself if the IRS asserts that you have understated your income by more than 25% and to keep them indefinitely if you are involved in anything that could be misconstrued as tax fraud. Note also that if you have carryforwards (such as a capital loss carryover) that affect future returns, you should keep the records that substantiate the carryover until such time as the SOL runs out on the future returns. Even though the IRS might not be able to collect back taxes on the previous returns, they can still disallow any carryovers on more recent returns. There are also other special papers you should hang onto: * Form 8606. If you make any non-deductible contributions to your IRA, you will need to keep this form until you finish withdrawing all the money from your IRA * If you are depreciating real estate or business property, you will need to hang onto records of the amount of depreciation claimed on previous returns until you dispose of the property. * Keep records of stock and bond purchases including mutual funds and especially including reinvested dividends until you sell your complete position. * Keep records of improvements to your home or business property. You will need these to establish your basis (and reduce your taxes) when you sell.

And also beware that if you live in a state that has an income tax, your state's statute of limitations may differ from the federal statute of limitations.