Even in a digital age, paperwork is important.
To be sure, more and more records are electronic now. But when it comes to preventing or preparing for an audit by the IRS, it's important to get good documentation of your financial transactions and keep it for a reasonable period of time.
A good rule of thumb is to keep copies of your tax returns for a minimum of three years. Supporting documentation that goes with the return should be kept as well for a similar length of time.
What other types of supporting documents should be kept? The list starts with cancelled checks, credit card statements and other records that relating to tax deductions or tax credits you intend to take. The documents to save could also include mileage reimbursement logs and receipts for charitable contributions.
There are also documents that should be kept longer than three years. Real estate records are in this category, for example, as are records of stock purchases or sales. It's also good to keep records of your retirement account balances.
The statute of limitations for an IRS audit is generally three years. But if the IRS suspects fraud or willful tax evasion, the agency may try to go back longer. It may also try this when a taxpayer fails to file a tax return.
When it is time to finally discard unneeded documents, it is important to do so safely in order to minimize the risk of identity theft.
In fact, the IRS does not merely recommend that unneeded documents be shredded. The agency recommends that they be shredded very systematically, so that paper strips that remain do not exceed 5/16 of an inch in width.
Source: "IRS details what to do with tax file paperwork," Patricia Sabatini, Pittsburgh Post-Gazette," 5-29-12