Over the course of a lifetime, each of us will accumulate a small mountain of documents, paperwork that is often carelessly tossed in a drawer and then, perhaps, eventually discarded. Though much of this paperwork is insignificant, there is plenty that needs to be saved and accounted for, especially when you are organizing your estate and home to best prepare for the future.
Document preservation and organization can go a long way in helping you organize your finances, create a record for tax purposes, and create an estate plan that is easy for your executor to carry out and clearly incorporate your wishes. For business owners, these document processes help streamline ongoing business administration and financial and tax reporting and can also facilitate succession planning or the due diligence involved in a sale.
Here, we outline what types of documents you should keep, why you should save them, for how long to save them, and how to safely dispose of paperwork that you no longer need. You can download a checklist of documents you should retain here.
Types of Documents:
Personal Records
The personal records that need to be kept can vary depending on the person, but there are several key documents that you should retain. When it comes to identification documents for yourself and for your family members, these can include birth certificates, death certificates, marriage certificates, and divorce decrees. Asset ownership documents would include deeds to real property, titles, stock certificates, or other certificates of ownership.
Tax Returns
The IRS provides some guidance on how long to retain tax and tax-related documents. Generally, you must keep your records that support an item of income, deduction, or credit shown on your tax return until the period of limitations for that tax return runs out. The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
The Period of Limitations that Apply to Income Tax Returns
- Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
- Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
- Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
- Keep records for 6 years if you do not report income that you should report and it is more than 25% of the gross income shown on your return.
- Keep records indefinitely if you do not file a return.
- Keep records indefinitely if you file a fraudulent return.
- Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure out any depreciation, amortization, or depletion deduction and to figure out the gain or loss when you sell or otherwise dispose of the property.
If you received property in a nontaxable exchange, your income tax basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property until the period of limitations expires for the year in which you dispose of the new property.
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.
For estate planning purposes, you should also keep copies of any gift tax returns that are filed, as well as copies of any estate tax returns that are filed for a spouse. These returns should be kept indefinitely during your lifetime, as they may be necessary or useful for your estate fiduciaries.
Business Records
If you are a business owner, companies have a longer list of records to maintain, especially when they have employees. Records to retain include but are not limited to, formation documents, governing agreements, ownership records, intellectual property records, financial records, personnel records, dispute or complaint records, and injury or illness logs.
Organizations also need to keep detailed records of any assets bought, sold, or transferred. All of these documents need to be kept throughout the life of a company, as they will be necessary for tax purposes as well as in the event of a sale or dissolution.
Considerations for Document Management:
Hard Copy Originals are the Gold Standard
When it comes to proving ownership, identity, or intentions, the best evidence rule holds that an original document is the superior form of evidence. Thus, any duplicates or copies may not be admissible if an original document exists and can be obtained. Regarding wills, it is especially important that there be only one original. If there are differences between copies of a will, even minor ones, it could give rise to litigation after death to determine which is valid. Additionally, original insurance policies, titles, deeds, powers of attorney, and trust agreements should be securely kept.
What About Digital Documents?
Digital documents have their place in our world and often make life easier, but their permissibility varies widely. For example, the IRS sometimes still requires wet signatures (ink on paper) on a document, whereas in other returns, you can sign and file electronically. Also, in Connecticut, many courts utilize electronic filing of pleadings and documents, thereby eliminating the need to submit originals of the same. The best practice would be to maintain the original copies of things you digitally submit so that you could provide a hard copy and meet the best evidence rule if required.
How to Decide What to Save
There are a few definitive rules you can follow when it comes to determining what documents to save. In the event that you have a document that is government-issued, there is generally only one, and you should do your best to keep it safe either on your person, like a driver’s license, or in a safe spot in your home for things like Social Security cards and passports.
When it comes to items like birth, death, or marriage certificates, it is often helpful to have multiple copies as these are documents that you may be required to produce in a number of circumstances. Having additional copies is even more important when it comes to death certificates, as multiple institutions (such as the probate court, financial institutions, and life insurance companies) will require an original copy to deter fraud and counterfeit claims. It is generally recommended that you obtain 10 to 20 copies upfront, as you may need to use most or all of them.
What to Do If You Need a New Original Document
When a new or duplicate copy of an original record is needed, you can generally obtain it at various official offices. The office of vital records where the event occurred will have live birth certificates, death certificates, and marriage certificates. The Social Security Administration and the U.S. Department of State are points of contact for social security cards and passports, while driver’s licenses and vehicle titles may be found at the Department of Motor Vehicles. Financial institutions will have bank statements and other financial records.
Business records like articles of incorporation, LLC formation documents, or business licenses can be found in the Secretary of State’s Office, where the business is registered. The IRS will have copies of tax returns and employer identification numbers. County clerks maintain copies of real estate documents like deeds and titles. Courts will have records of decrees, judgments, adoption records, liens, and other filings, and company human resource departments will have personnel records and employment agreements.
Many of these records can be requested online through official government websites, and attorneys can also assist in obtaining necessary documents. Make sure to have proper identification in order to obtain these records, and be aware of any fee that might apply to have a duplicate issued.
Conclusion
Err on the side of caution when it comes to document retention. If you are not sure if you need to maintain a physical copy, seek guidance from your attorney, accountant, or other professional service provider. Be aware that state and federal laws differ when it comes to how long individuals and businesses need to maintain records. Where there is a discrepancy between the two, use the longer period.
