Tax season offers an opportunity to finally dig through that shoebox or file cabinet where you've amassed a trove of old receipts, bank statements, pay stubs and other personal financial information.
Here are some tips on how to thin out that clutter of financial records you may have accumulated over the years:
1. The 3-year rule
A key reason to hold on to your past tax returns and supporting documentation is so you can address any issues should the Internal Revenue Service question any entries on a previous tax return. In most cases, the IRS has only three years after the return was filed to conduct an audit. That means one generally needs to keep past tax returns for at least three years, said Jackie Perlman of the Tax Institute at H&R Block.
"That does not mean when three years are up you should take your return and throw it in the trash," she said. "If you have some concern about being vulnerable to an audit or you think the IRS might look at your return later, you might want to keep that longer."
In the event the IRS suspects you've under-reported your income by 25 percent or more, the agency can audit your returns going back six years. And if the agency believes you committed fraud, it can audit your prior tax returns as far back as it wants.
If you've filed your tax return electronically, you can retrieve a copy on the IRS website. But it's best to only consider that a backup copy.
2. Future tax implications?
Some records, like weekly pay stubs, can be discarded after you've received your year-end pay statement. Even if you need to go back to a specific pay period, that stub can likely be recovered from your employer.
Still, you should hold on to records that may be a factor in future tax returns.
"Very often your tax return is your very best record of a lot of things you've done or haven't done," Perlman said. "You could want that information months or years later."
One example pertains to individual retirement accounts. If you make a nondeductible contribution to an IRA this year, for example, you might want to keep a record of that for years to come, when you begin to take distributions from the retirement account. At that point, such documentation could be necessary to establish that part of that future payout should be tax-free, notes Perlman.
3. Keep property records.
Financial records that apply to assets that could grow in value, such as a home, should be retained until you sell the asset.
Also, keep any records of major upgrades or additions to help figure the property value.
4. Know rules for employers.
Own your own business or have employees? The IRS requires that you keep employment tax records at least four years after any taxes for a given year become due or are paid, whichever is later.
5. Consider going digital.
Banks, credit-card issuers and other businesses now issue e-statements, which you can retrieve online or retain as copies on your computer. For paper records, make digital copies and store them on your computer.
"The original is the best evidence, but scanned copies will suffice for most purposes," said Ted England, a tax attorney in Ventura, Calif.
It's critical that copies are legible. Should a dispute arise with the IRS over a deduction, the agency will be looking to determine that the receipt - digital or not - is credible and not tampered with or incomplete.
Another consideration: where to store digitized documents. Computer hard drives can get damaged by viruses. Flash drives can become corrupted. CDs can malfunction. One option is to back up data online. But data stored in cloud services can potentially be susceptible to identity theft. Some cloud-storage services offer encryption features to ease such concerns.
Check out IRS Publication 17: www.irs.gov/publications/p17/ch01.html.