Some may think either you’re born a record keeper or you’re not. Well, in the days in which we live, everyone must perform some form of record keeping whether it comes naturally or not. Documentation is the basis of most, if not all of the financial area of our lives. Whether you’re using a fancy computer program or a shoe box to keep track of your finances, record keeping is a must.
First of all, find an area to keep your records both current and past. For the current year and previous year, keep records in an easily accessible place. This may be in an office or desk area where bill paying is done. Use labeled file folders to keep categories of finances separate. Then after the end of the year, transfer the files from the previous year to a storage box and setup a current file system for the new year. Keeping the files handy from one year past is always a good idea because it’s very likely that there will be a need to pull a document from the past year. Set aside a place to house the documents older than the previous year that is out of the way but will remain dry. A corner of a basement or utility room would work well for this. Only store things that you won’t need to get into frequently, like tax returns and the supporting documents.
Always store records by year. Writing the year(s) on the front of the box will make it handier when the need arises to find something. One box can store more than one year of records if there’s enough room to do so. Storing records doesn’t have to be costly. The local office supply store has turned storage into an art form, but just an ordinary box can more than do the trick. These receptacles are only to store papers, not to decorate. It’s even an economical idea to recycle the file folders and store documents either bound with rubber bands by category of receipts, or separated by a sheet of colored paper before storing in the box. Then the current year’s receipts can utilize the file folders for current year information. If there is a potential for any moisture being a problem, only use plastic-type storage boxes with lids for protection.
What types of papers need to be retained? Normally, the minimum paperwork to hang on to is any document that has any impact on your federal tax return. Prime examples of those documents would be tax returns, 1099’s, W-2’s, records relating to a home purchase, stock transactions, IRA statements, business or rental property receipts, bills paid, credit cards and other receipts, mileage logs, bank statements, canceled, imaged or substitute checks, and anything else that would show the year’s financial activity.
How long should a person retain records? The answer depends on what the record is. Some items should be held onto forever: copies of tax returns including copies of W-2’s, tax/legal correspondence, audit reports, contracts and leases, real estate records, corporate minutes and stock records, investment transactions showing gain/loss on sale of stock, copies of receipts that increase the basis (value) of property like your home, and copies of any legal document, ie, divorce decree, alimony, loans or retirement plans.
The IRS typically has 3 years to audit a return, but can open tax years up to 3 more if is suspects that the return would understate income by more than 25%. The following should be held for at least 6 years: bank statements, general ledgers and journals, sales records and journals, employee expense reports, canceled checks, paid vendor invoices, employee payroll records and depreciation schedules for the life of the asset.
It’s fine to condense boxes of records after the 6 year mark to make more room and clear out the clutter. Proper retention of documents is worth it.