Keeping Records: What can Stay and Go
Most taxpayers don’t have a problem keeping records for the immediate tax year. However, after the tax season is over, most of us forget about keeping records for past tax years. This results in one of two problems: if you’re like me, you don’t throw anything away. So you hold onto those tax records from when you were fifteen-years-old and had your first summer job. Or you have the opposite problem and you throw away anything you don’t think you need anymore–often this includes important records and documents. Either way, trying to recover any necessary tax documents could be something of a nightmare, but knowing the right way to manage and store tax documents will help you decide what to keep and what to pitch in the circular file.
What Records to Toss
Depending on your situation, you can generally throw anything away pertaining to your returns if it is has been three years since the filing year. There are some exceptions, of course, regarding the length of time to retain certain documents. Most previous tax year information can be disposed of three years after you file or two years after you pay a tax bill: whichever is longer. We recommend taxpayers keep records for seven years simply because it is better to have too much than not enough.
When to Keep Paperwork
It’s almost amusing what the IRS says about paperwork connected to failing to file returns or filing fraudulent returns. They say to keep records indefinitely. Seriously. You can see for yourself by clicking here. Other records to keep indefinitely include brokerage statements for taxable accounts, IRA nondeductible contributions, partnership documents, contracts, and property records (deeds and titles, namely). People who have businesses or rentals should also keep deduction documentation. There is a great article that was published in Forbes Magazine that has a lot of information about what can stay and what can go.
Organizing Important Documents
The best way to hold onto your important stuff is to scan it and store it electronically. If you have mountains of boxes of papers and receipts, keeping electronic copies of your stuff will make it easier to sort through. It also helps eliminate clutter, which is a total win-win if you ask me. Electronic files give taxpayers close to unlimited storage without taking up a lot of physical space. Just be sure to back up digital files so you always have what you need on hand.
You may be tempted to hold onto every receipt or paper if you have ever suffered through an audit. Although it is tempting, you really do not need to keep a record of every transaction or financial detail. Keep what you think you need. If you are in doubt, it does not hurt to hold onto the records until you speak with your tax professional. When it comes to food that might have gone bad, there is a saying. “When in doubt, throw it out”. When it comes to tax papers or records, when in doubt ask your tax professional. I know it doesn’t rhyme, but I think you all know what I mean.