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Tax compliance and the management of personal financial records

There is no single magic bullet for effective tax planning.

To be sure, the majority of taxpayers use a professional tax preparer to assist them with tax compliance. But even a competent preparer cannot make bricks without straw. He or she must first be given the necessary financial information to work with.

Whether you use a tax preparer or not, however, it can be difficult to gather numerous tax-related documents in order to facilitate the actual preparation of the return.

And so, in this post, we will offer a few thoughts on how to organize your financial records well to smooth the way.

You may be surprised, this far into the online age, just how much paper clutter surrounds you. Even if you are trying to move in a paperless direction, you may still have an abundance of paper files.

The contents of these files may include:
• Bank statements
• Previous tax returns
• Pay stubs
• Investment or retirement account statements
• Property tax records

Tax time, however, is a good time to cut the clutter. This begins with clarity about what records you really need to keep and what can be culled.

Let’s start with previous tax returns.

As we noted in our March 21 post, there are limits on how long the IRS can look back at your old tax returns. Unless there is some reason to believe the IRS would suspect tax fraud, it is generally not necessary to keep old tax returns and supporting documents for longer than six years.

Indeed, the general rule on how long the IRS can look back to audit you is only three years – though there are exceptions to this for suspected tax evasion.

Our point is that you don’t need to keep every tax return you ever filed, going back multiple decades.

This same reasoning applies to bank statements and pay stubs. Weekly or twice-weekly pay stubs can be shredded or otherwise discarded once a year-end statement of earnings is received.

There is also usually no reason to hold onto bank statements from past years. This is especially so given the availability of online statements from most financial institutions.

More broadly, it may make sense for you to not only cut down on the paper volume of your financial records, but also be watchful for ways to move more records to digital form. If there really is a certain piece of paper you feel you need to keep, it could be scanned and stored on your home computer.

In short, going paperless is a process, not a one-time event.

Source: The Daily Journal (Associated Press), "Five tips on how to tackle financial records clutter," March 27, 2014

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