Is it time to purge your files?

Is it time to purge your files?

December 21, 2021

Q: After working from home for the past 20 months, my home office is out of control. I have piles of papers everywhere. Not only is it embarrassing, but it is also getting hard to keep everything straight. My main problem is that my file cabinet is completely full. I know I should clean it out, but I get nervous about throwing stuff away—especially tax records. How long should I keep this stuff?

A: Based on your question, I think we have a lot to talk about. Let’s talk about tax records first and then I’ll share some ideas about how to keep your documents more secure.

In normal circumstances, the IRS limits its review of tax returns to those filed within the last three years. If they identify significant problems with your return, they could add additional years to the review, though they usually don’t go back more than six years. However, there is no statute of limitations for tax fraud. The following information was gleaned from the IRS website,

1. Keep all tax records for three years. As a practical matter, most audits begin within a couple of months after taxes are filed, but the IRS can request information for any tax return for three years after it was filed. Returns that are filed before the due date are treated as if they were filed on the due date.

2. Keep records for six years if you fail to report income that should have been reported and it is greater than 25 percent of the gross income shown on your return, or if the income is from foreign financial assets and is greater than $5,000.

3. Keep records for seven years, if you file a claim for a loss from worthless securities or a deduction for bad debt.

4. Keep records forever if you do not file a return or if you file a fraudulent return.

If you own income property, the rules for tax records get more complicated. You will need to keep records of capital improvements, as well as depreciation and amortization, in order to calculate your cost basis. These records should be kept until three years after you dispose of the property. However, if you do a 1031 tax-free exchange, your cost basis on the new property is based on the cost basis of the old property. Therefore, in addition to records for the new property, you also need to keep all the records required to justify the cost basis of the old property until three years after you dispose of the new property. Every time you do a 1031 exchange, you will add another layer of tax records to maintain.

Now let’s talk about cleaning up your documents. In today’s crazy world, you have to be careful about keeping your personally identifiable information secure. Fraudsters are increasingly sophisticated in how they use that information and brazen in how they gather it, including burglarizing homes. That messy desk of yours might be embarrassing, but it is also a treasure trove for someone wanting to steal your identity and raid your bank and investment accounts. Here are four simple steps to clean up your office and protect your identity.

1. Buy a fast and simple to use multipage scanner. A good one will cost between $350 and $700, but it is worth every penny.

2. Subscribe to an encrypted cloud storage service like DropBox. Subscriptions are relatively inexpensive ($10/month for 2 terabytes of data) and simple to use, and the files you put on DropBox are encrypted and stored securely with proper backup.

3. Get yourself a decent cross-cut shredder. You can get a basic shredder from Amazon for about $60, but if you have a lot of shredding to do, it might make sense to pay up for something a little faster and more durable.

4. Now for the hard part. You have to actually sift through your documents and make a decision: should you keep it or not? If the answer is no, then shred it. If the answer is yes, then scan it to DropBox and shred the original.

Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to