Keeping a copy of your tax return? Mandatory. Keeping it on paper? Silly.
The other day I picked up my tax returns from the accountant. Between my personal and corporate returns and the documents supporting them, it was at least 75 pages — probably closer to 100.
I shredded the entire stack.
It wasn’t easy. As a CPA of more than 30 years, I’m predisposed to worship records, not destroy them. Defiling paper as precious as a tax return? Sacrilege.
But I’ve gotten used to tossing my taxes, and you should too. Because the only way to approach paperwork these days is with a scanner. And the only way to keep it is digitally.
Digital storage has become so ubiquitous and competitive, you can now store your tax returns, as well as every other piece of paper you’ll ever touch, for nothing. So if you’re still storing mountains of paper, it’s time to stop. You’ll save time, money, stress and maybe a tree or two.
Here’s how I do it, step by step:
Step 1: Know what to stow and what to throw
The type of tax documents you should keep has been, if you’ll pardon the pun, well-documented.
- Tax returns. Keep a copy forever as proof you filed.
- Receipts, W-2s and other support for tax returns. The IRS generally goes back no more than three years in audits, so keeping the prior three tax years’ worth of the paper supporting your return is probably adequate. (See IRS Publication 552 for a detailed list of what to keep.) To be on the safe side, some pros suggest keeping this stuff for seven years. Here’s what the IRS says:
Generally, the IRS can include returns filed within the last three years in an audit. Additional years can be added if a substantial error is identified. Generally, if a substantial error is identified, the IRS will not go back more than the last six years.
- Paper supporting homes and investments. Because the sale of your home and the sale of investments are reported on your tax returns, you need to keep the paperwork documenting the price you paid for at least three years after they’re sold.
But while you should keep all of this paperwork, there’s no requirement it has to be on paper. The IRS is fine with digital copies. And that leads us to the next step.
Step 2: Toss out what you’re keeping
If you’re not in the habit of scanning your tax returns and other paperwork, you probably think the chief advantage of doing it is to save space and clear clutter. Wrong. Keeping drawers neat and eliminating filing cabinets is the icing. The cake? Being able to locate anything you want anytime you want it, then being able to send it anywhere in seconds.
Example: One of the main reasons you’d need prior-year tax returns, other than an IRS audit, is to apply for a mortgage. Before I got into the habit of scanning, that meant finding my prior-year returns, copying a giant stack of paper in case the lender lost it, then somehow getting it all to them, either by driving, mailing or faxing.
That costs time, money and, if even one page is missing, major stress.
If I wanted to apply for a mortgage today, I wouldn’t get up from my desk. I’d just go to my “Personal Tax Return 2013” folder and send the documents electronically. (Of course, I wouldn’t send sensitive information via email. I’d encrypt the file and use a secure file delivery service, like Dropbox.)
As for scanning, although my printer features a built-in, single-page scanner, that’s not what I use. I invested in a standalone scanner that does multiple and two-sided sheets. Not too expensive, and way faster. You can check out scanner reviews and prices here at PCMag and here at CNET.
Step 3: Make the rest of your paper less taxing
If you’re not receiving your bills online and doing your banking and investing online, start now. It’s faster, easier, cheaper and safer. Faster and easier because you can receive, review, retrieve, pay and find digitally stored bills and statements with a few mouse clicks. Cheaper because you’re saving stamps. Safer because if you properly back up your digital files, they’ll never fade, get lost, feed a fire or float away in a flood.
And don’t stop with your financial life. One of my fattest files used to be full of owner’s manuals. From an electric drill to the refrigerator, I kept them all, often long after the stuff they related to was a distant memory.
Today? As soon as I bring something home, I do a Web search, find a PDF copy of the manual online and save it in a digital folder. When I need to consult one, I search a folder in seconds rather than a drawer in minutes.
You get the idea: Whenever you have a piece of paper in your hand, make it a habit to ask, “Do I need this?” If the answer is yes, see if it’s already being stored online and either bookmark it or download it. If it’s not already online, scan it and store it.
Of course, there are exceptions to every rule. When in doubt, don’t throw it out. In general, keep paper with original signatures or raised seals, like wills, contracts, titles and deeds. These documents should still be scanned as a backup, but store the originals in a safe place.
Step 4: Don’t go forward without backing up
There’s a risk to storing important papers digitally — data loss. Almost everyone has suffered from a hard drive crash or stolen laptop. But while losing photos from your last vacation may be tragic, losing your tax receipts can be expensive in an audit.
While you could back up by duplicating your records on a thumb drive or other media, that could also be lost if your house burns down. Solution? The cloud.
I use cloud storage from Microsoft OneDrive, Google Drive and Dropbox. All offer free storage space. It’s not enough for every picture you’ve ever taken and song you’ve downloaded, but it’s plenty enough for every piece of paper you’ve generated.
You can read recent reviews of these and other services in this CNET article. And if you’re concerned about the security and privacy of your cloud-stored files — and who isn’t? — check out this Lifehacker article.
Finally, keep in mind that any sensitive information is only as safe as your computer and cloud account. Always use strong passwords on both, as well as your home Wi-Fi. And always keep your anti-virus software up-to-date.
Bottom line? One day soon this article will seem quaint, because paper records will follow vinyl records into oblivion. Digital is better, so digital will win out. If you’re not already on board, this tax season is as good a time as any to start.