SPRING CLEANING

Kathleen A. Ellis

If your filing cabinet is overflowing with documents yellow with age, it may be time to do a little spring cleaning. First, consider your filing system. Sloppy filing habits may result in loss of tax deductions and hours of time searching for records in unorganized piles of documents. Create a simple filing system and make it a part of your routine.

Consider which documents should be retained and which may be discarded, but be conservative when you decide to discard documents.

Many records should be kept indefinitely. These include birth/marriage/death certificates, health records, divorce papers, adoption papers, and title insurance policies.

Many records must be kept because they support a tax return. Although a 3 year statute of limitations generally applies to the Internal Revenue Service, there is no statute of limitations if the service claims fraud or failure to file. In addition, lenders and other private parties may require that you produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you. As a practical matter, retaining tax returns indefinitely and records that prove an item of income or a deduction appearing on your return for 6 years after the return is filed should be adequate.

Records relating to the purchase price of your home and capital improvements should be kept until 6 years after a return is filed reflecting a taxable sale of your home. When new property takes the basis of old property, as in a 1031 exchange, records relating to the old property should be kept until 6 years after a taxable sale occurs.

Once you make the decision to discard documents, shred anything which discloses personal financial information, social security numbers, bank or credit account numbers, or other information which could be used for fraudulent purposes. Items which may be discarded include receipts and warranties for items no longer owned, warranties which have expired, personal correspondence, utility bills, credit-card statements, and other documents which do not support a tax deduction or serve as the basis for a legal claim or defense.

If you have any questions regarding particular items, consult your accountant or attorney. IRS Publication 552, Recordkeeping of Individuals, and Publication 583, Starting a Business and Keeping Records may be helpful.

 

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