6 steps to organize your tax documents
Every year I put off doing my taxes until a last-minute scramble for receipts and documents. (I have a side gig selling vintage furniture, so I have lots of business expenses to deal with.) After I’m finally done filing, I throw everything in a box and shove it in the closet, but those boxes are piling up. There is so much stuff to keep track of before and after Tax Day, but I’m never sure what to keep and for how long. Help!
—Megan, Coeur d’Alene, Idaho
You aren’t the only tax season procrastinator—not by a long shot. Up to a quarter of all tax filers wait until the final two weeks before the IRS deadline to get their returns in. Which, as you’ve already gathered, isn’t supersmart, given that most people will get a refund. But for someone like you, swimming in receipts and scrambling for documents, the pain is acute.
Know this, though: Once you do bite the bullet and get organized, the relief you’ll feel will be like the weight of a thousand receipts lifted off your shoulders.
“Learning how to organize documents is a skill anyone can learn,” said Rashelle Isip, a New York City–based organization consultant who blogs at TheOrderExpert.com. “Yes, it requires patience, discipline, and dedication to put and keep paperwork in order, but the returns can be great when it comes to one’s peace of mind.”
OK, but when you’re standing at the bottom of Mount Paperwork, how do you even begin to sort through it all? And how do you know what to keep and what to shred once you’re done? Here are a few tips to get you started.
- Make an upfront time investment. Tossing a bill or a receipt into a pile somewhere in your house takes about 0.3 seconds. (I’m sure, somewhere in the world, there’s a scientist studying this.) Sorting it all out come tax time can take approximately…forever. Budgeting more time on the front end—an hour or two to set up a filing system, a minute or so to file each new piece of paper—will pay off big-time. You’ll spend a lot less time wandering around the house looking for stuff and muttering under your breath like a crazy person.
- Create a centralized system for paper documents. This might sound complicated, but Isip recommends a simple approach. “It’s easier to receive, open, and process salary, income, and investment documents when you have a designated storage location for them in the home or office,” she said. “Simply labeling a manila folder ‘tax documents’ and placing any relevant materials inside it can do the trick, as would an accordion file folder, shoe box, or even a magazine holder.”
- Electronic recordkeeping is where it’s at. If the thought of paperwork freaks you out—or you’re just a techie sort of person—scan your receipts and download your online statements into a folder on your computer. (If you don’t have a scanner, phone apps like Genius Scan or Scanner Pro work great.) Yes, the IRS is A-OK with this method. If you use electronic records, though, you must back them up securely in a cloud like Dropbox or Google Cloud. This isn’t just my inner IT department talking; it’s an IRS requirement. (Even people who keep paper copies of everything should store an electronic copy in the cloud.)
- Laziness could cost you—literally. In the case of electronic statements and forms, it’s tempting to just leave them online until you need them. Don’t. Many institutions make electronic records freely accessible on their sites for only a period of, say, a year or eighteen months—maybe less. After that you might have to request them, which can take a few days. You may even be asked to pay a fee.
- Maintenance prevents crisis. If you’ve created a system, you’re halfway there. The other half is using it. Pick a specific time to file: every day when you get the mail, every Friday while you’re watching The Great British Baking Show, or when you pay your bills. Isip had one client, a small business owner, for whom tax season “always ended up being quite an ordeal.” She advised her client to carry a physical folder around during the day for receipts, and then deposit them in a central location at home every night, throughout the year. It worked.
- Follow the “Forever or Seven Years Rule.” In general, the IRS has three years to audit you once you file a return, but if it identifies a substantial error, it can go back further, generally six years. However, if someone files a fraudulent return or tries to skip out on paying taxes altogether, there is no statute of limitations. So you should keep your returns—and your W-2s and 1099s—forever, and supporting financial documents for seven years. (For much more on what to keep and for how long, see the handy financial filing chart in Chapter 2 of my book Get a Financial Life.)
Don’t put off getting organized until Mount Paperwork magically disappears. Instead of doing your taxes in your usual, chaotic way this year, create that folder and go on a receipt hunt. Organize your W-2s and 1099s. Go digital. You’ll be setting a precedent for better tax season behavior next year. Who says it’s too late for New Year’s resolutions?