What to do with all those tax documents?

Being a packrat when it comes to storing those pesky tax documents may not be such a bad thing. Many accountants get asked how long certain documents should be stored before shredding. Here is a little insight on the timetable for keeping certain tax documents.

Never destroy copies of your tax returns or proof that you have paid any balance due. While the IRS will only audit you for up to three years after you file in most cases, an error of 25% or more on your return, could open the statute for up to six years. In other situations, such as fraud, there may be no statute of limitations.

Always save property records! One of the big difficulties many people face is in establishing the basis (tax cost) of an asset held for decades when they finally sell it. This applies to real estate, stocks, retirement accounts, insurance policies, collectibles, etc. Keep all purchase records, improvement receipts, reinvestment records, and anything else related to the ownership of your assets.

You can shred personal utility bills after a year or two and business/rental utility bills after four to seven years. Any bills supporting deductions on your tax returns should be kept until the statute of limitations has run out for that return.

Even if you don’t organize your files, by keeping all records in one place, you can sort them out when necessary. Also, if you live in a disaster-prone area, consider keeping online copies of important personal and business records — and irreplaceable family photos. That way you won’t have to struggle to reconstruct anything after an earthquake, tornado, flood, fire or hurricane.