How many years worth of old tax returns do you have in your garage? Before I downsized and moved to a condo less than half the size of my house, I kept them all. I had three file cabinets in my garage so there was no urgency to throw any old documents away.
But there is no compelling reason to keep them forever either. So if you are like me and live in a small space or you just want to simplify your records, shred the old financial records. Here are some guidelines around what you need to keep and what you can get rid of:
Tax Returns: The IRS suggests you keep your old tax returns for three years. However, the IRS can investigate a return and collect taxes for up to six years under certain circumstances so it makes sense to keep your records the full six years, just in case.
There is no limitation for fraud, however. The IRS can look back indefinitely for that so if there is any question on a deduction on your past returns, keep them and all the supporting documentation. If you have a real concern, it would be a good idea to have a tax preparer give you an opinion. You can always file an amended return if there is a problem or if not, at least you put your mind at ease.
Worthless securities: If you have a security that is a total loss and you claim the loss on your taxes, keep your records for seven years.
W-2s: Keep your employment records for four years.
Tax information tied to assets: The IRS suggests you keep your real estate information and mortgage records for three years after you dispose of the property but you might want to keep them for six years (for the same reason you keep your tax returns for six.)
There is one thing all taxpayers have in common. No taxpayer wants to be audited by the IRS. If they are, however, having all the financial records for that year will go a long way to reduce the stress of the audit and help to provide a positive outcome. If your filing cabinets are full to the brim, scan your documents and save them to a hard drive and back them up to a cloud drive like an iCloud or Dropbox file so they are available if you do get the dreaded IRS audit letter.