Ever since A&E created the show Hoarders about individuals who hold on to items forever to the point where it detracts from their lives, our firm has worried that we might eventually see a client featured. Though people don’t often hold on to tax and financial documents out of compulsion but more out of fear of not being prepared for an IRS audit should one ever occur.
“The specter of an IRS audit does loom large, but the IRS generally has a time limit of three to six years to audit a return, depending on the type of error they suspect,” says Brian Wendroff, Managing Partner for WendroffCPA.“By and large we suggest tossing records that also have an electronic version, such as bank and credit card statements, and creating a system to organize the rest in a central location.”
Though your standard shoebox may work (it’s modular and empty), we strongly suggest a good accordion file, which lets you organize your documents alphabetically or according to your preset criteria.
For guidance on a specific document not listed in the following chart, contact an Rita Schooley at WendroffCPA at 703-553-1099. We’ll cover business tax returns in a future tax tip, but for now the following chart should help guide you as to which individual tax documents to put in that accordion file and for how long:
|Documents||How long to keep it||Why?|
|Tax Returns and Supporting Documents (W2s, 1099s, charitable contribution receipts, ect)||Seven years to forever.||The IRS has three years to audit your return if it suspects good-faith errors, six years if it believes you under-reported your income by at least 25 percent and an unlimited time if it is investigating fraud. At the very least save your W-2s until you get a statement from Social Security confirming your earnings.|
|rokerage Statements/Investment Records||Keep monthly statements for one year until you receive the annual statement. Keep the annual statements for as long as you own the security plus seven years.||You need proof of your purchase to prove capital gains and losses on your tax return.|
|Retirement Plan Statements||Keep quarterly statements for one year until you get the annual statement. Keep annual statements until retirement.||Records of your contributions to your Roth IRA prove that you already paid the tax on it.|
|Home Improvement/Real Estate Documents||Until you sell the home plus seven years.||They establish your costs basis in the home and could help lower your capital gains tax on the property.|
|Credit Card Statements||One month||Switch to strictly e-statements if possible, otherwise toss them after checking for accuracy.|
|Pay Stubs||One year||Shred once you get your W-2 and you make sure the numbers match.|
|Bank Statements||Seven years, though online banking can often provide an electronic PDF.||They provide proof of income from interest-bearing accounts and can be a record of tax-related transactions.|
|Utility/Phone Bills||One month||Keep until you get the next statement showing that you paid unless you need them for taxes.|
|Receipts||One month for general receipts. Expensive items, for as long as you own the item.||Sometimes warranties for expensive items require a receipt, or if you need to prove an item’s value to an insurance company.|