Every year, it’s nice to do a bit of “financial spring cleaning” and declutter your filing cabinet, your desk drawers, and the various hiding places where miscellaneous scraps of paper tend to accumulate and multiply. Read on to find out what you should be saving, and what’s OK to shred.
If you’re long overdue for some organization in the paperwork department, start here! This category includes all the super-important life stuff that’s usually issued to you only once (and therefore is a total pain to replace):
This category includes all supporting documents for your income tax return, plus a couple of other odds and ends. This may seem like a long period of time, but it’s not an arbitrary number—7 years is how far back the IRS can go to audit a tax return. The breakdown is a little more complex than that: you can be audited for any reason up to 3 years after you file a tax return, and up to 6 years after you file a tax return if you omitted 25% or more of your gross income—which technically makes the auditing window more like 3 to 7 years. We wanted this guide to be thorough, so we’re sticking with 7 years as a recommendation!
An audit is an evaluation of your tax return to verify its accuracy and to ensure compliance with tax laws. Many people associate being audited with having committed tax fraud or some other shady financial behavior but, in fact, a number of taxpayers are audited on a random basis each year. If audited, you are required by law to provide the documentation that supports the claims made in your tax return. In some cases, additional information may be required in order to verify a claim you’ve made—it might just be a matter of providing a canceled check, a receipt or a bank statement. In other instances, the audit may take place on-site (meaning at your residence or workplace) or at an IRS office. Being well-organized is the best way to make the process as quick and painless as possible.
So, what sorts of documents should you hold on to for 7 years?