Don't store your tax return -- toss it out
Keeping a copy of your tax return? Mandatory. Keeping it on paper? Silly.
This post comes from Stacy Johnson at partner site Money Talks News.
The other day I picked up my tax returns from the accountant. Between my personal and corporate returns and the documents supporting them, it was at least 75 pages -- probably closer to 100.
Then I shredded the entire stack.
It wasn't easy. As a CPA of more than 30 years, I'm genetically predisposed to worship records, not destroy them. Defiling paper as precious as a tax return? Sacrilege.
But I've gotten used to tossing my taxes, and you should too. Because the only way to approach paperwork these days is with a scanner. And the only way to keep it is digitally.
Digital storage has become so ubiquitous and competitive, you can now store your tax returns, as well as every other piece of paper you'll ever touch, for free. So if you’re still storing mountains of paper, it's time to stop. You'll save time, money, stress and maybe a tree or two.
Here's how I do it, step by step:
Step 1: Know what to stow and what to throw
The type of tax documents you should keep has been, if you'll pardon the pun, well-documented.
- Tax returns. Keep a copy forever as proof you filed.
- Receipts, W-2s and other support for tax returns. The IRS generally goes back no more than three years in audits, so keeping the prior three tax years' worth of the paper supporting your return is probably adequate. (See IRS Publication 552 for a detailed list of what to keep.) To be on the safe side, some pros suggest keeping this stuff for seven years. Here's what the IRS says:
Generally, the IRS can include returns filed within the last three years in an audit. Additional years can be added if a substantial error is identified. Generally, if a substantial error is identified, the IRS will not go back more than the last six years.
- Paper supporting homes and investments. Because the sale of your home and the sale of investments are reported on your tax returns, you need to keep the paperwork documenting the price you paid for at least three years after they're sold.
But while you should keep all of this paperwork, there's no requirement it has to be on paper. The IRS is fine with digital copies. And that leads us to the next step.
Step 2: Toss out what you're keeping
If you're not in the habit of scanning your tax returns and other paperwork, you probably think the chief advantage of doing it is to save space and clear clutter. Wrong. Keeping drawers neat and eliminating filing cabinets is the icing. The cake? Being able to locate anything you want anytime you want it, then being able to send it anywhere in seconds.
Example: One of the main reasons you'd need prior-year tax returns, other than an IRS audit, is to apply for a mortgage. Before I got into the habit of scanning, that meant finding my prior-year returns, copying a giant stack of paper in case the lender lost it, then somehow getting it all to them, either by driving, mailing or faxing.
That costs time, money and, if even one page is missing, major stress.
If I wanted to apply for a mortgage today, I wouldn't get up from my desk. I'd just go to my "Personal Tax Return 2013" folder and send the documents electronically. (Of course, I wouldn't send sensitive information via email. I’d encrypt the file and use a secure file delivery service, like Dropbox.)
As for scanning, although my printer features a built-in, single-page scanner, that's not what I use. I invested in a standalone scanner that does multiple and two-sided sheets. Not too expensive, and way faster. You can check out scanner reviews and prices here at PCMag and here at CNET.
Step 3: Make the rest of your paper less taxing
If you're not receiving your bills online and doing your banking and investing online, start now. It's faster, easier, cheaper and safer. Faster and easier because you can receive, review, retrieve, pay and find digitally stored bills and statements with a few mouse clicks. Cheaper because you're saving stamps. Safer because if you properly back up your digital files, they'll never fade, get lost, feed a fire or float away in a flood.
And don't stop with your financial life. One of my fattest files used to be full of owner's manuals. From an electric drill to the refrigerator, I kept them all, often long after the stuff they related to was a distant memory.
Today? As soon as I bring something home, I do a Web search, find a PDF copy of the manual online and save it in a digital folder. When I need to consult one, I search a folder in seconds rather than a drawer in minutes.
You get the idea: Whenever you have a piece of paper in your hand, make it a habit to ask, "Do I need this?" If the answer is yes, see if it's already being stored online and either bookmark it or download it. If it's not already online, scan it and store it.
Of course, there are exceptions to every rule. When in doubt, don't throw it out. In general, keep paper with original signatures or raised seals, like wills, contracts, titles and deeds. These documents should still be scanned as a backup, but store the originals in a safe place.
Step 4: Don't go forward without backing up
There's a risk to storing important papers digitally -- data loss. Almost everyone has suffered from a hard drive crash or stolen laptop. But while losing photos from your last vacation may be tragic, losing your tax receipts can be expensive in an audit.
While you could back up by duplicating your records on a thumb drive or other media, that could also be lost if your house burns down. Solution? The cloud.
I use cloud storage from Microsoft OneDrive, Google Drive and Dropbox. All offer free storage space. It's not enough for every picture you've ever taken and song you've downloaded, but it's plenty enough for every piece of paper you've generated.
You can read recent reviews of these and other services in this CNET article. And if you're concerned about the security and privacy of your cloud-stored files -- and who isn't? -- check out this Lifehacker article.
Finally, keep in mind that any sensitive information is only as safe as your computer and cloud account. Always use strong passwords on both, as well as your home Wi-Fi. And always keep your anti-virus software up-to-date.
Bottom line? One day soon this article will seem quaint, because paper records will follow vinyl records into oblivion. Digital is better, so digital will win out. If you're not already on board, this tax season is as good a time as any to start.
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"The IRS generally goes back no more than three years", generally. If on the other hand, they find omissions or other items they deem questionable they will go back ten, especially If they keep finding questionable items or a pattern of evasion developes. So, not having those returns and schedules could be expensive or remove you from your freedom for a few years. The tax courts, absent proof to the contrary, Always find in favor of the IRS, Always!. I have every tax return I have ever filed and all suporting documents. Think of these papers like a condom, It's better to have one and not need it thans it is to need one and not have it. They store nicely in plastic bins and are safe from damage accept a fire.
Storing your tax returns and other documents digitally is fine right up until you find your credit score in the toilet because your information was hacked and used to buy someone else a lot of nice things. A tax return contains everything an identity theif need to put you in the poor house. Any sight can be hacked, think Target and all those credit card numbers. Thank you no, I'll keep mine in the stone age method of bins.
Paper is a biodegradable, renewable, sustainable product made from trees. Growing and harvesting trees provides jobs for millions of Americans. Working forests are good for the environment and provide clean air and water, wildlife habitat and carbon storage. Thanks to improved forest management, we have more trees in America today than we had 100 years ago. Nobody has ever told a farmer he's a corn killer.
Perhaps this is ok for personal taxes, but we owned a small business which had been closed 12 years when the state tax auditor came after us. He claimed that he had been trying to find us for years, as if we had secretly gone into hiding. We had moved about a mile away from our previous home, but had the same telephone numbers, were in the phone book, and had continued to file personal tax returns the entire time. He insisted that we provide records from our closed business. We still had boxes of stuff, which we did provide, but anything electronic had long since disappeared on a dead business computer. It still should not have been a problem, but the auditor decided that we had not paid a $4000 payroll tax. When we could not provide proof that we had, and questioned how long such records were supposed to be maintained, he said that we were required to maintain records forever as long as we owed money to them.
Over the next few months we provided document after document, but our bank advised us that many of their records were destroyed during Hurricane Katrina. Finally they located an electronic copy of the cancelled check to the DOR for the exact amount the auditor said we had owed. We provided that to him, but he said it was useless without a copy of the BACK of the check. On a Friday morning the bank contacted us to say that they were forwarding a copy of the back of that check showing that the DOR had, indeed, deposited it. We called the auditor to tell him. Two hours later, while enjoying a celebratory lunch, the auditor called to advise us that we had until 4:00 to pay a total of $28,000 in back taxes and penalties or all of our property would be seized. When we reminded him that the cancelled check would be there that afternoon he said that it didn't matter as we couldn't prove that the DOR had not used the money to pay something else that we owed (although he had not found that we owed anything else). We asked to see the DOR records showing where the check had been used and we were told that they are only required to maintain these for three years
The tax attorney we hired gave up because, as someone else noted, the tax courts always find in favor of the IRS (or, in this case, the state DOR). I wanted to continue to fight it, but my husband became very depressed and just wanted it behind us. We took out another mortgage on our house, paid the money, and tried to forget about it, but we NEVER throw away tax records anymore!
TMI? Sorry about that. It still makes me angry to think about this. Not sure that I proved any point here. I wanted to say KEEP YOUR RECORDS, but obviously we found all of the pertinent records in our case and it still did no good.
so I am supposed to waste time scanning all these pieces of paper, to put them on a computer that will be obsolete in three years. It is a lot easier to simply store the paper. my tax forms amount to a small folder for each year. I don't trust that my computer cannot be hacked, stolen, or the "cloud" hacked.
what stupid advice.
The writer is a 30 year CPA and she has someone else do her taxes??????
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