02/03/2010
In December and January, we purged files, tossed out old books, cleaned down to the crevices in all the office nooks and crannies. The shredders ran steadily. All of us at Zaffore CPAs have a whole new lease on work life – it feels great to get the clutter GONE. It clears the cobwebs from the brain and just makes everything look and feel energized.
If you are inspired to detrash the secret (or not so secret) work spaces in your reality, here are a few thoughts about the tax and financial records you really ought to keep for awhile (or forever, whichever comes first). Let me tackle the IRS requirements here, and for everything else, I found a great chart at one of my favorite web sites, www.bankrate.com . You’ll find the exact link below.
We get the question from at least a dozen people a year – how long do I have to keep my tax returns? There is no simple answer – even the IRS says to keep them for as long as they are important. Clear as mud? In general it means that if you are going to be audited, you will probably be contacted within three years of filing, so certainly, keep your returns and all the back up documentation for at least three years (actually, four years, since states have an additional year to audit when the IRS is finished with you).
However…if you managed to underreport your income by more than 25%, the IRS has up to six years to find you and assess additional tax. So – if there is any possibility that you forgot to report the sale of an investment, an errant W-2, a stock option exercise/sale etc etc etc, you might consider keeping your returns and back up documentation for at least six years.
If you reported a loss from worthless securities (we’ve seen a lot of those over the past year) or claimed a bad debt expense, keep your tax return and documents for seven years.
And, of course, if you did not file a tax return or filed a fraudulent return, the statute of limitations never runs – so, keep your returns and documentation for – ever. If you willfully filed a fraudulent return, please don’t come to our practice looking for assistance. But what if you filed a return and the IRS just THINKS it is fraudulent? First, you will need an attorney…and then to defend yourself you must have kept your tax returns and tax documents – forever. Good news though…how often does it happen that the IRS investigates relatively innocent people for fraud? Just about never. There are enough guilty ones to keep them busy.
With all of the above in mind, here is our advice. Keep your tax returns and documentation forever. But that does not mean you need to keep stacks of moldering paper. This is the 21st Century. When you get your tax return back from your preparer this year, take 15 minutes and scan it into your computer along with all of the documentation, front and back. Check the scan to make sure it is legible—this is an important step. Make a copy of the scan and save it to two flash drives. Check the drives to be assured that the data is on the drives. Keep one flash drive in your desk drawer for easy access and put the other one in your safe deposit box. That is three back ups. Then, drum roll please, shred the documents – most of them have your name, address and social security number on them and you do not want to throw those into a dumpster.
In our practice, we have tried to simplify your clutter by burning your tax returns onto CDs for the past 6 or 7 years. This year we are going one step further. We will post your tax return and back up documents to a secure portal that can be accessed only by a password. You alone will have the password (and if you lose it, it is easy for you alone to reset it). Only you or we will be able to access your data. You can download the information to your computer and ask us to delete it from the portal OR you can leave the return on the portal so that you can access whenever you want to it for up to two years. We are trying to do our bit for the environment, but also to help save our collective sanity by cleaning up all the clutter. [Caveat: technology changes. Hint: stay relatively current.]
What about all the other stuff – insurance papers, house purchase documents, medical records etc ad infinitum? For a fairly comprehensive list of all the other stuff you should scan and put on flash drives stored in your safe deposit box, take a look at the web address below. I don’t agree with the tax return advice, but the rest of it looked reasonable and reminded me that life is way too complicated.
www.bankrate.com/finance/personal-finance/how-long-to-keep-financial-records.aspx