Taxpayers should retain their federal returns and backup documentation for three years in most cases, states TurboTax. This is the maximum time in which the Internal Revenue Service can initiate an audit. Taxpayers who pay state income tax should keep their records until their states' statute of limitations expires.
The paperwork retention recommendation is longer for taxpayers in some situations, TurboTax notes. The IRS can examine six years of records if it finds that taxpayers underreported their income by at least 25 percent. Audits can stretch back seven years for taxpayers who claim losses from bad debts or worthless securities. In cases of willful tax failures or fraudulent returns, no statute of limitations for IRS audits applies .