Today is Tax Day, the last day to file your federal income tax return with the Internal Revenue Service (IRS). You’ve spent the last several weeks collecting sensitive financial documents and now you’re probably wondering what to do with them. Financial documents may contain information, such as your Social Security number, that you should keep private in order to prevent identity theft. Therefore, the Privacy Rights Clearinghouse has compiled a guide on document retention and destruction tips to help protect your privacy.
What records do I need to keep for tax purposes?
- You should save any records that support items shown on your submitted tax return. When in doubt, ask your accountant, attorney or tax preparer. For a complete guide to tax recordkeeping, see IRS Publication 552, Recordkeeping for Individuals.
- Also, save any records that may be needed for future tax returns, especially records relating to any property you own. For example, keep receipts of home improvement projects so that when you sell your home, you can calculate the capital gains tax.
How long should I keep my tax records?
- The general rule is three years, because the IRS can audit your return within three years of its filing date. However, if the IRS suspects you of underreporting your gross income or if you’ve filed a fraudulent report, the agency has longer to challenge you. To learn more, see Bankrate's How Long to Keep Financial Records.
- If your state has an income tax, you should also check with your state’s taxing authority to see if they require you to hold your records for a longer period of time. For example, in California, the Franchise Tax Board can issue a tax assessment for up to four years after the tax return’s filing date or due date. As a practical matter, this means that California residents would need to hold onto their records for an additional year beyond the federal requirements.
How can I securely store my tax records?
- At the very least, paper documents should be kept in a locked drawer or cabinet in your home. A fireproof safe would be even better. For maximum protection, you may want to use a bank safe-deposit box.
- If you plan on saving an electronic version of your tax records, make sure that your files are encrypted. Otherwise, a lost or stolen device could compromise your privacy. You can find free encryption programs at http://download.cnet.com/windows/encryption-software/.
How should I destroy old tax records?
- For paper documents, shredding is the best way to dispose of documents that contain private information. Always use a cross-cut, diamond-cut, or confetti-cut shredder. Unlike strip-cut models in which the pieces can potentially be put back together, these shredders will produce much smaller pieces. Crooks will dumpster dive for this type of information, and it could be used to commit identity theft or otherwise invade your privacy.
- For electronic records, use wiping or erasing software to make sure the data is completely scrubbed from your hard drive, USB memory stick, CD, or other portable device. Deleting a file does not completely destroy the data. Two free software programs that can completely remove electronic data are Darik's Boot and Nuke and Heidi Eraser.
In addition to correctly storing and destroying tax records, Tax Day is a good reminder to review your general recordkeeping practices. Remember, your data dump might be an identity thief’s treasure.