Recordkeeping - Questions from Readers

Dear Tax Guide,
My husband is self employed. What records do I need to keep for the IRS and for how long? My old papers are stored in many, many boxes, and I would love to clean them out. Thanks.

Dear Reader,

This is a great question. Knowing how long to keep your old records and documents is key to protecting yourself in case the IRS wants additional information, but at the same time you don't want to clutter up your home.

The basic rule of thumb is this. Keep your tax-related documents for at least the statute of limitations. For audits, this is three years from the date you actually filed your return. If you filed your return early (before the April 15th deadline), the statutory period begins on April 15th.

However, there are two important exceptions to this 3-year rule. First, check the statute of limitations on audits for your state. Most states have a 3-year statutory period, but some states such as California have a 4-year period. Ask your tax preparer, or run a quick web search on your state government's web site.

Second, keep any documents about real estate, business assets, stocks and bonds, and other assets you own for as long as you own the asset, and then for at least 3 years after you dispose of the asset. Why? When you sell or dispose of the asset, you will need to calculate your cost basis, figure your capital gains, and report this information to the IRS. If you don't keep these original documents, you will have a hard time proving that your tax calculations were accurate in the event of an IRS audit.

This sounds like a lot of paper documents hanging around taking up valuable space. I can definitely sympathize. Here's some ideas for keep these valuable tax documents, while reducing your clutter.

• Scan your documents, and make a CD-ROM for each tax year.
• Use an accordion file or box for each tax year, and put your documents in storage.
• Keep separate files for your long-term assets.
• Make CD-ROMs of your most valuable documents, and put these CD-ROMs in a safe deposit box.

Before you throw your tax documents away, make these final checks:

Check your Social Security statement and compare your earnings to the information on your W2s and tax returns. If you haven't received your Social Security statement, you can request from for the Social Security Administration. Every so often, income from your W2 or self-employment income from your tax return doesn't show up on your Social Security Statement. The SSA has procedures in place to help you correct an error in your record of earnings. Do this before throwing away a single tax document.

Check the date you filed your tax return. Sometimes people filed an extension, or prepared their taxes late after the extension had expired. Make sure it has been at least three years after the tax return has been filed before you throw it away.

Call the IRS and ask for a "Record of Account" for a particular tax year. Your accountant can do this for you, and help you read this IRS printout. Sometimes, adjustments have been made to a tax return, and either you didn't know about it, or you forgot about it. This is an opportunity to make sure any IRS problems for a tax year have been settled before you throw away your important documentation.

Scan your tax documents and save them to a CD-ROM. I'm being just a little superstitious here. You've heard the old story about how you'll need something the day after you throw it away. Having scanned copies of your tax documents will take up less space, and so you won't feel guilty about throwing away your paper files.

Shred your old tax and financial documents. This is crucial in our information age. This will prevent anyone from stealing your identity theft, obtaining your tax and financial information, and perpetrating fraud against you.