Tax time is also often “clean out the paperwork” time. As you sort through your files and paperwork, you may wonder what to keep and for how long.
If you choose to keep all of your records electronically, we recommend that you also have a hard drive storage. That way if something happens and you lose access to the third party storage, you still have electronic back-up of the records. Remember you also need to pay attention
If you’re keeping your records in paper format, there will come a time when the sheer bulk of the files means it’s time to clean house.
There are a number of variables:
(1) What type of file is it? We set up ‘permanent’ files for long-term files such as asset purchases, insurance policies, pension plans and bank accounts. We set up “temporary” files for activities in that year including sales receipts, expenses, deductions and the like. The permanent files are kept forever. The temporary files are kept only as long as you need to.
(2) What are applicable state statute of limitations? The IRS can only go back 3 years for audit, but some of the states have much longer statute of limitations. For example, Arizona is 6 years. Remember for tax purposes, the date starts at the time of filing. So if you file your 2012 Arizona income tax return on 4/15/13, you have to keep your records until 4/15/19. You may also want to check in with your attorney in case there are also some legal reasons to keep your records longer.
Here is a story I did on Cash Flow Accounting’s website with more detail on temporary and permanent files. http://www.cashflowaccounting.com/blog/how-long-do-i-keep-tax-records/