How long should I save my tax records?
The general rule is to make sure you have the documentation supporting entries on your tax returns for as long as the returns can be audited. The best and safest thing to do is keep most records for 7 years; and some even longer. Here's why.
The IRS can audit your returns for 3 years after filing deadline or actual filing date, whichever is later. The N.M. Taxation & Revenue Dept. can audit until December 31 of third year after return is due. Notice that for your IRS returns the 3-year clock ends 3 after the return is filed, whereas for N.M. returns it ends after the return is due. The result is the IRS has longer to audit returns that are filed late. Important: Other states rules may be different.
The best practice is to save most tax records for 7-years. This total is 6 years the IRS has to audit if you omit more than 25% of gross income plus the year that's being audited.
Tax returns should be kept forever. It is your responsibility; you can't rely on the IRS or a professional tax preparer to have them.
Proof of purchase of capital assets should be saved almost forever. Capital assets have a useful life of more than one year and the deduction for their cost is determined by the rules for depreciation. Those rules say that that the deduction must be spread over the number of years of their useful life; and the 7-year clock doesn't start until the year the final deduction is taken. That can be an unexpectedly long time. Take the case of an office desk that has a useful life of 7 years. The receipt would need to be available for 14 years.
What should I do with my records?
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does. If you're not sure what to keep or for how long, you can scan them and save them on your computer. (Just be sure you have backup in case of computer problems.)
Tip: You don't have to keep the actual paper records - you can scan them. Your virtual filing system should enable you to find documents when you need them. Giving digital files descriptive names is the key to easily finding them. Don't just accept the default name given by your scanning software - names like Scan01 or IMG2021062501 don't tell you about the document in the file. And be sure you have backups in case your computer is lost, stolen or you hard drive needs to be replaced.