Now that the calendar has turned over to a new year, it’s a good time to organize your files and get rid of unnecessary paperwork.
But before you toss those old papers into the recycling bin or delete three years’ worth of e-mails, make sure you aren’t getting rid of something you might need later.
“The IRS has clear standards for ordinary situations and individual taxpayers, which is that you only need to keep records for three years,” explains Ann C. Logue, author of “Socially Responsible Investing for Dummies” and a lecturer in finance at the University of Illinois at Chicago. “For businesses, it is also three years, except for employment records, which should be kept for four years, and depreciable equipment, which should be kept for the life of the equipment.”
Why would you need to keep records on hand? Because, Logue says, if the IRS suspects you of committing fraud, whether you are a business or an individual, it would expect you to have kept those records for reference.
“In other words, your defense can't be that you no longer have the records,” she explains. “So if you are doing something shady but possibly legal, keep your files.”
Even if you don’t file a return, you need to keep those records for at least three years so you can prove that you didn’t need to file should the IRS come calling.
Personal documents to retain for at least three years, according to the Bay Area accounting firm Greenstein, Rogoff, Olsen & Co., include credit-card statements, utility bills, medical information and expired insurance policies. The IRS recommends that you hold onto bank statements for three years as well.
Tax-related bills, wage information and sales receipts should be kept for six years.
For businesses, the recommendation is to keep correspondence with customers and vendors, deposit slips, notes and purchase information for at least a year. Employment applications should be kept on file for three years; employment-related tax records for six.
Not sure whether to get rid of that shoebox filled with tax-related documents ? Then it’s best to err on the side of keeping it, at least until you can check with your accountant.
When you do decide to dispose of old documents, Logue strongly suggests shredding everything before tossing it into the recycling bin.
“Those records have a lot of information that you probably don't want your neighbors to know, and certainly don't want to get into the hands of an identity thief,” she said.
There may even be a cheery ending to all this paperwork drudgery.
“If your recycler won't take shredded material, a green alternative is to compost it or use it for mulch,” Logue said. “If you are worried about chemicals from the ink or the paper, use your shredded records with flowers or non-edible plants.”