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How long must I keep bank statements, bills, etc...

Customer Question
I am going into the...
I am going into the service so I want to get rid of as much useless paperwork as possible for storage.

i just need to know how long I have to keep records of my expenses, paycheck stubs, bank statements, etc...

Thank you
Kim Hicks
Submitted: 12 years ago.Category: Tax
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Answered in 35 minutes by:
9/22/2005
Tax Professional: Dennis Cook, Tax Accountant replied 12 years ago
Dennis Cook
Dennis Cook, Tax Accountant
Category: Tax
Satisfied Customers: 62
Experience: 30 Years Experience - Tax Accountant in private practice
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Dear XXXXX -

There are several ways to answer your question, and several things for you to consider in dealing with this issue:

1) HOW LONG YOU SHOULD KEEP YOUR TAX RECORDS, BECAUSE A GOVERNMENT ENTITY COULD RAISE ISSUES ABOUT YOUR FILING AT A LATER DATE:

MOST individuals should retain their income tax filings (and relevant documents that support those tax returns) for a period of at least seven years before disposing of them. If your return is selected for adjustment because of "matching errors" between what you reported, and other payers have reported to IRS (or a state jurisdiction), you will normally know within three years after your return has been filed whether or not that tax entity intends to audit or make additional corrections or adjustments to it.

However, be advised, that in instances where the tax entity alleges fraud or blatant omissions and misstatements were made by the taxpayer or his agents, tax returns CAN be audited and adjusted for a period of up to seven years after their submission. Usually, the average taxpayer need not be concerned about a seven year audit period. However, I mention that in case there are some issues you know about (which I don't) that is prompting your question.

2) HOW LONG SHOULD YOU KEEP YOUR TAX RECORDS AND VAROUS OTHER DOCUMENTS FOR PURPOSES OTHER THAN COVERED IN #1:

This is where you need to put "your thinking cap on", and ask yourself what is in the records I am intending to dispose of - - - which I may, "for God knows" reason need at a later date.

a) You may need to be able to prove (to a future employer, state or county agency, court of law, etc.) that you really DID work for "Acme Aerospace Industries" at some point. The proof is recquired because of a future job interview, state or county evaluation of your qualification for some job training program, or participation in a civil action filed by former employees of "Acme Aerospace Industries" regarding their pension plan. Unfortunately, you chucked those tax returns which had copies of your W-2's, pension contributions, etc., in the trash a year before you discovered that "Acme" was out of business, "broke their papershredder the week before they closed up" and no records are available, and all the people you used to know and work with are now dead and long gone. No one but you can vouch for your employment history in many cases. Even the IRS has a hard time reproducing your return after several years have passed. Is your tax retun really that bulky? HINT: I have every tax return I ever filed. It doesn't really take up that much room.

b) Here is another consideration: If you have been a sole proprietor, many of the assets you have purchased over the years are referenced in the tax returns you have been filing (for the last 25 years or so). You may keep wonderful records today on Quickbooks and you are not really concerned when you are informed you are being audited for 2003. But, when you get into the audit, the IRS auditor want to review your deprciation schedules. He/she questons whether or not many of the assets you are currently depreciating are valued properly. The reference point to that value comes from 1995 when your conversion of an office in the home took place, and various improvements to your home became depreciable assets your business employs. HINT: Those tax returns really aren't taking up that much space, are they, Candace?

c) Taxapayers walk in my office every year informing me they sold an old stock they purchased back in 1980 and sold in the last tax year. I haven't done their returns that far back. They haven't kept any of their returns that far back either. It's a shame too, because had they keep their 1980 return, they sold (and showed the purchase) on that identical security. Unfortunately, the broker and brokerage who sold them the stock are dead or out of business. No records exist to determine their cost-basis in the security. HINT: WHEN YOU ARE LOOKING AT DISPOSAL OF ANY FINANCIAL PAPERWORK - ask yourself:

Do I still own (and perhaps - am I still paying for) that house, car, security, air conditioner, major improvement to a home like a roofing job, etc.? Then you know what, you owe it to yourself to save the contract, checks that were used to make the payments, purchase invoice, warranty information, name of the realtor and associated closing papers, etc. You never know when and how that may become important in your life.

When I go through old bank statements, if I am paying (by installment) on something, I pull out every check (or keep the statement that shows the withdrawal electronically) until that thing has long been paid for. I can't tell you how many financial banks, brokerage houses, insurance companies, realty companies, title companies, etc., have gone out of busiess or been acquired and merged with larger concerns over my professional lifetime. If you are relying upon them to tell the story for you (that may need to be told), good luck! If you are dealing with a merged bank that can't seem to find any records of your transactions from 10 years ago - and they think you owe them some more money on something - grab your ankles!

GET MY POINT! Don't be too quick to throw things (like financial records) away to make room for your shoes in the closet. Those records may - just may - be worth a whole roomfull of shoes to you when you find you could have benefited from them in the years down the line. I had a client get an entire roof redone because they kept their cancelled check, contract agreement, and the business card of the dealer who had re-roofed their property 12 years ago. The dealer was long out of business and deceased. The manufacturer of the tiles claimed they did not know anything about the dealer the client had paid to do the work. However, when they could proove all of the above, the manufacturer honored their "25 years guarantee" on the work, and the whole job (materials and labor) were free! By saving those receipts, they saved over $ 20,000 on the cost of a new roof for their home!

Dennis Cook
Dennis Cook, Tax Accountant
Category: Tax
Satisfied Customers: 62
Experience: 30 Years Experience - Tax Accountant in private practice
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Customer reply replied 12 years ago
Reply to XXXXX XXXXX's Post: What about copies of bills such as electric, phone, etc..?
Tax Professional: Dennis Cook, Tax Accountant replied 12 years ago
DearCustomer-

If you are (have) been operating a business out of your home, and are using utilities as deductible expenditures against trade or business income - then you might want to keep such utility bills for at least three years, in case of audit or examination - from a tax point of view.

There are reasons to keep old utility bills, however, beyond whether they are being used for tax purposes:

a) If you believe your home's heating or cooling costs are exceptionally high - it might be useful to keep a couple of comparison bills from the last few years (gas, electric, water, etc.) to refer back to. This is particularly true when you are considering replacements of furnaces, air conditioners, etc., for more "fuel-efficient" models. Part of the sales pitch is how much money you will save, if only you spend $X replacing older equipment. Sometimes that's true, and sometimes it's not!

b) Depending on your circumstances, utility bills in your name are as good a credit reference for many consumer transactions as a credit card is. It shows you pay your bills, you are established in your home, and worthy of credit (providing there are not a lot of other negatives out there) from others. In fact, many lenders couldn't care less about your credit cards - they want to know if you have utilities in your name (particularly phone bills)!

Most utility companies now will charge you for copies of their own utility bill if you happen to lose or misplace yours. The charge can be as much as $5, $10, or $20 per month for such statement copies.

If you forsee no other practical use for the utility bills than what I have addressed earlier, then "chuck them". Just be clear about addressing why you WON'T need them in the future, before you do so!

I know that my advice may sound like: "Throw nothing away! Everything has value!"

In fact, I gave you some of my criteria for evalutating the value of paper in my first answer to you,Customer

1) Will I ever need this for tax purposes?
2) Will I ever need this to establish credit?
3) Will I ever need this to prove that I worked somewhere, and made $X over a period of time?
4) Will I ever want to know what I paid for that stereo, automobile, lawmower, air conditioner, etc., and when I purchased it, and where I bought it, and what warranties or guarantees attached to that purchase?
5) Is there something/anything I have invested in (which I haven't sold yet) and may need to establish what I paid for it - and when?
6) Is there something/anything I am buying over time (auto, house, etc.) that it might be useful to me - and smart - to keep copies of bank statements and/or checks which prove that payments were made faithfully over the years - until I actually own it, and the issue will not come up ever again?

Some people look at paper as a great burden to keep - and don't know what is valuable and what is not, so they keep everything.

Others toss paper away at the drop of a hat, and would find it hard to prove they lived on the planet a year ago - if their bank, brokerage, employers (present & former) could not bail them out with copies of records in the years to come, if they should ever need them. The real problem for people like this that sometimes their bank, brokerage, employers (present & former) will be out of business - and unable to reproduce such records for them in the near future!

The trick is to come down somewhere in the middle of things (protecting what you have reason to believe is worth protecting) by keeping essential records which you may need to represent your own interests before a tax agency, retirement plan administrator, creditor, future employer, etc.

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