The Internal Revenue Services does not require taxpayers to save records or documents in any particular fashion. That said, if the IRS comes knocking on your door for a tax audit, you should to be able to provide evidence to back up all the information on your tax returns, and that means holding on to tax-related documents in some orderly fashion.
Income and Payments
Save all documents that identify income you received, including W-2 statements from employers; 1099 forms that report non-employment income, such as interest or dividends; bank and brokerage statements; and K-1 forms, which indicate your taxable profit from businesses. For any expenses reported as deductions, keep evidence of payment: receipts, sales slips or invoices; and canceled checks or bank statements that show electronic withdrawals. For donations to charity, either cash or goods, keep statements or receipts identifying the value of your donation.
Keep documents related to your home. These include the settlement statements from home sales or purchases, which detail all items paid for by both parties at the close of a home sale; 1098 forms listing tax-deductible mortgage interest and property taxes; records of money spent on home improvements; and insurance records. If your moving expenses are deductible, which is often the case for job-related moves, be sure to keep all related receipts and invoices.
If your income includes alimony, keep records of how much you received; alimony is taxable income, though child support is not. Gambling winnings are also income, although you can reduce them by your amount of gambling losses, provided you can supply evidence of those losses. Similarly, keep all evidence supporting deductions or tax credits you claim for alimony paid; child or dependent care expenses; disaster or theft losses; educational expenses; contributions to retirement plans; medical and dental expenses; and state and local income taxes.
If you operate a business as a sole proprietor, you report your business income and expenses on your personal tax return, so it's critical that you keep good records. Save all invoices and track when they go out and when you receive payment. For unpaid invoices, document your attempts to collect. Save receipts for all business expenses, and keep them organized. If you report a business use of your home, save evidence of any expenses for which you take a full or partial deduction, such as utility bills, insurance or repairs and maintenance.
How Long Should You Keep Documents
The IRS says you should save records for "as long as they may be needed." In general, you have up to three years to file an amended (that is, corrected) return for a particular tax year. Similarly, the IRS has up to three years to ask you to provide evidence for items on your return. So you should save documents for at least three years. If you claim a loss from stock or other securities that have become "worthless," save all records related to the loss for seven years. If you knowingly under-report gross income by at least 25 percent, save records for six years. And the IRS says that if you fail to file a return for a given year, or you've knowingly filed a fraudulent return, you should keep your records forever.