Tax records are like insurance policies; you hope they’re never needed but keep them just in case.
With each year that comes and goes, tax records accumulate and so do questions about what to do with them. What do you keep and for how long? Where do you store them?
The IRS, via its Publication 17, offers guidelines for which tax records to keep. When it comes to where and how to store tax records, professional organizers and time-management strategists are helpful.
Length of keeping tax records
The IRS recommends the following guidelines for how long to keep tax records:
Three years: Tax returns with all schedules and supporting documents, including receipts.
Four years: Business owners and independent contractors should keep documents such as employment records, gross receipts, invoices, bank statements, proofs of purchase and asset records.
Six years: Forms W-2 and 1099. The IRS has up to six years to contact you about unreported income.
Seven years: Documents associated with claim or loss from worthless securities or bad debt reduction.
No limit: If you filed a fraudulent return or failed to file.
Varies: Records related to property should be kept until the period of limitations expires for the year in which you dispose of the property. Similar to statue of limitations, this is the time period in which the IRS and the taxpayer can take action on a tax return.
It’s important to maintain these records to calculate any depreciation, amortization, or depletion deduction, and to figure the gain or loss when you sell or transfer ownership of the property.
Some states that tax incomes have longer limitations for auditing than the IRS. Check with your state’s department of taxation.
Double check with your insurance company or any creditors — they may require you keep some property records longer.
Where and, how to store tax records
Keeping tax records is pointless if you can’t locate or retrieve them when needed. That’s why it’s important to choose the proper place and containers to store records, said Terry Monaghan Founder and CEO of the Washington D.C.-based time management and productivity consulting firm Time Triage.
“I store my tax returns in a drawer in the small file cabinet in my office. If you are going to store them somewhere else, make sure you have a water proof/water tight box. I’ve seen people just put them in boxes in the garage, but critters can get into them there. Nothing like having your old tax returns be shredded up into a mouse nest.”
Once you decide what to toss, Monaghan suggests shredding any records with identifying information, such as name, address, birth date or account numbers.
Keep it simple, says Dayana Yochim, who writes for The Motley Fool. She recommends a basic three-folder system with files for income, expenses and deductions and investments.
In the income folder, Yochim says to include “all income sources (and amounts earned) on a single sheet.” Update the sheet as income occurs. This will make filing taxes easier next year.
Forbes magazine’s Kelly Phillips Erb believes in always having a backup plan.
“If you scan, make sure those records are in at least two places. Consider an offsite space for storage records — and don’t forget about the cloud,” Erb said in a July 2013 article.
Even if you file taxes electronically and store PDFs of your tax returns online or on hard drives, Monaghan recommends keeping printed copies.
The most important thing is to keep a system that makes sense to you. Trying to remember where and how you stored your records wastes time.
“Studies indicate most of us will spend 45 minutes every single day looking for something. This adds up to 6-8 weeks every year – just spent looking for things (papers, documents, keys, stuff),” said Monaghan. “When your important records are in one place, consistently, you can use that time for other activities.”