Spring Cleaning: When is it Safe to Trash Old Financial Records?

The warm weather always brings about the urge to do a little spring cleaning. Now that Tax Day is in the rearview mirror, you may find yourself wondering which financial records and documents can be added to the trash pile and which ones should be filed for safekeeping.

As you declutter, follow this handy guide so you can make the right choice and not toss anything that may be important down the road:

FOR INDIVIDUALS:

The Three-Year Rule

As a general rule, you are usually safe to throw away financial records from more than three years ago. Now that Tax Day has passed, you can clean out records from your 2014 tax returns, filed in 2015. The IRS can audit your tax returns for three years, so in most cases, you are safe beyond that timeframe. Here are some records that can be disposed of after three years:

• Receipts
• Expense reports
• Bank notices
• Sales records

Exceptions to the Three-Year Rule

Of course, every rule has its exceptions. The IRS is permitted to audit you under a couple different circumstances:

• If the IRS has reason to believe you understated your income by 25 percent or more, they have six years to audit you.
• If they suspect you of fraud, there is no statute of limitations.
• If you fail to file a tax return at all, there is no statute of limitations.

Records that Have Their Own Time Frame

Some financial documents don’t follow an exact time frame but instead, depend on other factors. These records include:

• Completed tax returns. Keep forever. It’s always in your best interest to be able to prove that the returns were, in fact, filed.
• Real estate records. These should be kept on file for as long as you own a property, plus for an extra three years. These records should also include relevant files for home improvement and insurance claims.
• Stocks and bonds records – such as dates, quantities, prices, dividend reinvestment and investment expenses – should be kept as long as you have the investments.
• Regardless of the type of IRA you have, it is imperative to keep copies of Forms 8606, 5498 and 1099-R on file until all of the money is withdrawn from the account.

FOR BUSINESSES:

Three, Four and More Years:

The number of years a business should hold onto financial records varies from the time frame of individual records. Here are a few rules of thumb:

• Employee records. These should be kept on file for at least three years after an employee has left your company. If there is any unclaimed property – such as an employee’s last paycheck – this should be kept indefinitely.
• Employee expense reports. If your employees kept records of mileage logs or additional expenses, keep these for three years after the employee was terminated.
• Employment tax records. These should be kept for four years after the date the tax was due.
• Business property. Similar to personal property, the IRS requires that records relating to your business’s property be kept on file for as long as you have the property, plus seven years.

MISCELLANEOUS FINANCIAL RECORDS:

When sifting through old financial documents, you may find a few outliers that don’t fit into any of the aforementioned categories. Help determine their viability with these general rules:

• Medical expenses. Medical bills should be kept for three tax years, just in case your insurance company requires proof of a doctor’s visit.
• Home utility bills. If you are trying to prove a home tax deduction, keep these on file for the standard three years. If not, they are safe to pitch after a year.
• Marriage licenses, birth certificates, wills and similar personal records. Keep forever, no exceptions!

Remember, if you do have the green light to throw away any of the above records, shred them for maximum security.

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Questions? Call our Greeley office of CPAs and Accountants at 970-378-4830 to get your questions answered!