March 1, 2020

To Shred or Not to Shred?

As we launch into another tax season, clients often ask us about how long specific documentation should be retained. Disposing of records prematurely can create potential tax and legal headaches that could be avoided easily. On the other hand, keeping records too long may waste precious space and resources.

It is important to keep track of your documents in order to:

  • Protect your Social Security or retirement benefits.
  • Avoid having your refund grabbed by other states if you have earned income in multiple regions.
  • Protect your insurance policy in the event that your insurance provider changes policy rules.
  • Prepare for potential audit.

We have compiled a list of important documents with suggestions for how long they should be retained according to IRS recommendations. Please keep in mind that other financial institutions, such as insurance companies or creditors, may require that you keep tax documents for longer periods than are required by the IRS. Some sources even recommend that important tax documents should be retained indefinitely as these records may impact your retirement plans or other long-term financial projects of substantial consequence.

If you decide to get rid of extraneous files, always remember to shred documents before disposing of them, especially if they contain sensitive information (account numbers, personal identification numbers, etc).

Tax Returns and Supporting Tax Documents

Keep returns and supporting documents for at least 7 years. Although the statute of limitations for an IRS audit expires after three years, under-reporting income by more than 25% automatically extends the statute of limitations to six years. In other words, the IRS may not audit your return over six years after it has been filed. Please note that in cases where the IRS considers there to be tax fraud, there is no statute of limitations.

Keep gift tax returns, valuation reports, bank records, trust documents and other items substantiating a gift tax return until the donor’s estate tax return is settled.

Realize clients should note that we keep records of the returns that we prepare and supporting documents used in preparation of these returns based on IRS and California guidelines.

Monthly Bills

Shred monthly bills once payments clear the bank account. Receipts for larger, insured items should be kept for insurance purposes.

Pay Stubs

Save only the most recent paystub if it contains year-to-date information. You may need three to six months of history if you intend to apply for a mortgage.

Credit Card Receipts and Cancelled Checks

Keep credit card receipts and cancelled checks until you review your statements and verify expenses. Keep these documents for seven years if they substantiate business related expenses.

ATM Receipts

ATM receipts may be shredded after you balance your checkbook. Confirm that deposits have been posted.

Credit Card Statements, Bank Statements, and Utility Bills

Hold on to these documents for at least three months if for personal use. Maintain these for seven years if for business use, or if used to substantiate tax deduction.

401(k) Statements

Keep monthly or quarterly 401(k) statements until the annual summary arrives. Save your annual summaries until the account is closed.

Non-Deductible IRA Contributions

Maintain IRS Form 8606 “Nondeductible IRAs” which is prepared and included in your tax returns for every year that you make nondeductible contributions to your IRA until you withdraw your funds.

Insurance and Medical

Keep all health related records and bills for a minimum of five years.

Satisfied Loans

Save documents relating to satisfied loans at least for seven years.

Home Purchase Documents, Home Improvement/Repair Receipts, Warranties, and Auto Records

Keep these records for as long as you own the assets to which they are related and 7 years after sale of your home. If the records in question relate to home repairs, keep them for at least 10 years.

Mortgage

Keep all mortgage documents for at least seven years after mortgage is paid off.

Permanent Documents

Certain documents such as birth certificates, adoption paperwork, education records, professional license records, military records, marriage licenses, divorce degrees and death certificates should be kept forever.

Still unsure about which paperwork you need to keep in your file cabinet? We would be happy to discuss best record-keeping practices with you, especially as they pertain to your individual tax situation.

Sources Cited:

How long should I keep records?” IRS.gov. Internal Revenue Service, Last Reviewed or Updated 1/16/20.

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