Now that the April 18th tax filing deadline has passed (and your returns are filed…hopefully), you may have a pile of W-2s, 1099s, and all sorts of other papers sitting in a stack, and you’re wondering whether you need to keep it all. The short answer is yes! You’re probably also thinking about the papers sitting in your filing cabinet/boxes/closet/attic/storage, gathering dust over the last five or twenty years. Is it really necessary to schlep this stuff around every time you move? Unfortunately, there’s no short answer to this question.
IRS recently issued Tax Tip 2011-71 “Tips for Managing Your Tax Records”. Unlike me, they don’t use the word ‘schlep’ in a sentence, but, like me, they do give some good advice. The first tip is one that you may have heard before, that is, tax records should be kept for three years. The reason for this is that IRS generally has a three year statute of limitations to audit a tax return. This is three years from the due date of the return, or when you file the return, whichever is later. It would follow, then, that if there’s a chance that your 2010 return could be audited within the next three years, keep your supporting papers for the next three years.
Now before you go tossing all your 2010 stuff out three years from now (or tossing out all of your 2007 papers now), check out IRS’s second tip, which is “some documents-such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property-should be kept longer”. This article would be way too long if I gave you examples for every one of these things, but the idea here is that you need to keep any documents that will help you compute a gain/loss claimed on a tax return (such as a capital loss on a sale of stock, or gain on the sale of a home). So while you’re in the heat of spring cleaning, before you toss out those boxes of papers, make sure they don’t contain something you’ll need in the future.
As far as the types of records you need to keep, IRS’s tip says “…bills, credit card and other receipts, invoices, mileage logs, canceled/imaged/substitute checks, proof of payment, and any other records to support deductions or credits you claim on your return”. For this, personally, I like to work backwards. If I have an accordion file full of papers, I’ll toss out anything that had absolutely nothing to do with either my business or personal taxes. And when I say ‘toss out’ I mean shred… you can’t be too careful these days. Whatever’s left I’ll keep for at least three years.
There are other tips that IRS has, but we’ve run out of time. I’d be happy to tell you about them; just contact me for more information. And please, leave a comment, to let others know how you deal with your records.