With the New Year’s holiday in the rearview mirror, now is when nearly everyone’s minds begin to drift towards dealing with the annual PIA called Tax Day. Even if you are one of the lucky ones who no longer need to file, you can’t tell me that there isn’t just the faintest tickle in the back of your brain that says “oh lord, is it that time of year again?!?!?!” As part of the annual ritual, we often try to discard something (or somethings) as a way of making room for all the new stuff we need to keep. I thought it would be a good idea to do a quick rundown of what you really should keep, what’s optional, and what can hit the shred bin.
Let’s start with what you should be keeping forever (or “permanently”). You should be maintaining copies of all of your tax returns along with records of payments for any tax liabilities and the supporting tax documents (those W2s, etc…) forever and ever. This category also includes your divorce documents, military service records, birth & death certificates, and medical records. Now don’t freak out on me – we’re really only talking a handful of papers for every year more than seven years old and I have my historical returns from 1986 to 2013 in a single Bankers Box. These days, you can scan or receive many of these documents as a .pdf. There are pros and cons to keeping things electronically though. Pros: electronic versions definitely take up less space in a small home. Cons: I know of a couple different people whose electronic backup was corrupted and all those records are gone. Of course, I also know of two different house fires that toasted the family paper documents so that’s not a perfect solution either. Me, I’m a paper gal so I’ll continue to use my “permanent records” box as a shelf for my cats to look out the window, but I am considering spending one of those free weekends everyone keeps talking about experiencing to scan some old stuff…
The next category is the things you need to keep for seven years. This time frame is somewhat deceptive since the seven years usually start AFTER a triggering event. Seven years AFTER you sell a property or investment, you can shred the documents related to that investment. Seven years AFTER you leave a job and roll your 401k, you can get rid of the old documents (although I’ll be the first to say this one’s on my list of “overkill” criteria). If in doubt, this is the time frame I encourage people to use. We can thin the ranks a little by only keeping year-end statements as long as it is a year-end summary statement, not just the December or 4th quarter statement.
Finally, we have the short-term category (three years). This applies to mainly bank statements, to which you are saying “bank statements? I can get those on my bank’s website.” To which I say “maybe…” Most financial institutions only keep about 18 months on the public-access sites. Longer than that, they may or may not have them and most banks will charge you for the privilege of accessing your own records (sometimes by the page).
So why do you need your bank statements? Let’s segue to a quick recap of the IRS auditing schedules: The last three years is completely open season for the IRS (three years from the return date OR the filing date, whichever is later). Now, IF you get audited and they find something hinky, they can go back another three years and root around like a pig looking for truffles. If that “hinky” turns out to be considered fraud, there is no time limit – you might as well make up the spare bedroom and invite the auditor to stay for a while (to digress, am I the only one who took a small amount of perverse pleasure in watching Wednesday’s implosion? Talking about the IRS just brought that to mind – I wonder why….). If you don’t file a return, which is perfectly legit for some people, there is no time limit on the audit period (which is why I often encourage people to file a free & easy EZ or SR form even if they don’t owe anything just to get the clock started). Should you be worried about an audit? Not in the slightest. Using 2017 stats, assuming you made less than $200k and don’t have a business, only 1 in 364 returns got audited and the majority of those were computer audits (the “our records don’t match” kind). The IRS focuses its dwindling resources on what they call the “traditionally non-compliant” and few of you are international small business owners. Does this mean you shouldn’t keep your bank statements – I didn’t say that in the slightest…
Here is a link to download a handy set of Records Retention Guidelines.