Your Guide To Post Tax Season Clutter

Your taxes are done (unless you filed for an extension), and now you are stuck with the aftermath. Unless you are one of those neat freaks (nothing wrong with that, I’m just saying), you may find yourself looking at a pile or two of old receipts, bank statements, etc. What to do with all of this stuff?

Hint: Stuffing all of that clutter into a file drawer till next year is not the best strategy…

Pack Rat or Scaredy Cat?

Face it. Whether it’s from a fear of suddenly needing some arcane bank statement from 12 years ago or a fear that the Internal Revenue Service (IRS) will knock on your door one night asking for that receipt back from 1983, most of us hang onto too much stuff for far too long. Then this same stuff seems to grow and breed in the back of the closet until the whole space is filled with bank boxes full of files.

Paperless Office? Not So Much!

You may remember some of the promises of the early 80’s. “It’s a new era,” the tech people boldly proclaimed, the era of a paperless office! Whole forests will be saved with this new digital way of doing business. If only that were true. The reality is that we print more now than we ever did before, and it ends up being stuffed into drawers and closets just in case.

Old Habits

Here’s the problem. Habits from the pre-digital era are hard to break. Think about it. There used to be a time when saving your bank statement meant something. You could always pull it out of file and march down to your local branch and confront the manager in person. Nowadays? You can do the same thing, but you don’t need to keep a copy in your file cabinet anymore. It’s all available for you online.

Spring Cleaning

Now you understand the issue, let’s get to work taking care of it. Realistically, there is no need to hang on to much of those old financial records taking up space in your home.

Even our friends at the IRS say you don’t need to hold onto those financial docs forever. If you head over to their website, you can find what they call “Publication 552 Record Keeping for Individuals,” which explains (in their language) what they expect you to hold on to.

The Reader’s Digest Version

Seven Years

Let’s approach this from the bottom up. So, per the IRS, 7 years is the longest period of time you need to retain your tax files. Understand that even 7 years does not apply to most people. The 7 year rule actually only applies to those individuals that filed a claim on their tax return for worthless securities.

Say you happened to be one of those shareholders who got shafted by the collapse of Enron Corporation. You dutifully recorded your loss as worthless securities in your 2001 end of year tax filings. Per the IRS guidance, you only need to retain those Enron stock records through 2008.

Six Years

Next in line per Publication 552 is the 6 year record rule. The 6 year window applies to anyone who may have underreported their income by 25 percent or more. Relax, this is not about maximizing your deductions or that kind of thing.

Income under reporting most often shows up when a big portion of your income shows up from what is termed a “closely held” business, and there are some asset sales. Here, look at this example. Suppose you purchase a lemonade stand for your kids to work during the summer break. Then at the end of the season, you sell the assets of the business. This is the sort of transaction that falls under the 6 year rule.

Three Years or The Rest of Us

Last on the list is the 3 year rule. The 3 year rule applies to the majority of people. You could refer to this one as the IRS three year statue of limitations. If you don’t fit the criteria above for the 7 year or 6 year rule, then the 3 year rule applies to you. That means you need to hold on to your Federal and State income tax returns, and all the supporting documentation for those returns, for three years.

What’s Next?

Now that you can find where you are on the “how long to keep it” list, discard the rest. Actually if you want to be environmentally friendly, shred it first (a good idea to protect your personal information anyway), then recycle it. Hey, what if your tax return from 1993 ends up being recycled and turns out to be the front page of the Wall Street Journal? Why not?

Bottom line: Let go of the need to hang on to that clutter of old financial records. Figure out where you fall with the three timelines discussed above and get rid of anything else.

Well, there you go. Your 411 on hanging onto old tax records. Do you find yourself in the “I better save it just in case” category or not?

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