There is an old saying that goes “nothing lasts forever” but, if you look at the tax record-keeping system that some consumers have, you might believe just the opposite. Many people keep every single scrap of tax evidence that they’ve ever gotten “just in case” but the fact is that, in most cases, this simply isn’t necessary.
While it definitely is necessary to hold on to tax records that identify your income sources, track your expenses and determine the value of things like property and assets, common sense and storage space should ultimately be your guide to what to keep and what to throw away.
“We get people looking at boxes of stuff in their basements and ask, ‘Can I toss it?'” says Linda Durand, a CPA and senior tax manager with Drolet & Associates PLLC in Washington, D.C. “A lot of it, they can.”
In normal situations the amount of time that needs to pass before a tax audit is no longer possible is three years after filing and, as a rule of thumb, holding onto tax papers after that time isn’t necessary. On the other hand, if the IRS suspects that your income was underreported, that time period increases to six years. (The IRS must suspect that you underreported by 25% or more.)
Because of this, most accountants advise their customers to keep documents for 10 years but, after that, in almost all cases, there’s no need to keep them around any longer.
“Anything that you need to do your taxes, hang onto it,” says Saul Rudo, a tax attorney and partner in the Chicago office of Katten Rosenman LLP. She does however advised that you “don’t go overboard”. For example, unless you used something to claim a deduction, you can probably shred it, all of those medical bills that you’re keeping, rather than being important, are simply taking up space, especially if you didn’t accumulate enough of them to meet your deduction threshold.
The fact is that some tax documents have a longer shelf life than others but very few need to be kept longer than 10 years. The only paperwork that really needs to be kept any longer than that are those covering assets that could eventually be sold (triggering a tax bill) like a pension plan a home or stock market investments. Three years after selling these assets the paperwork on them can be put through the shredder as well.