Do you have a file cabinet full of old bank statements and pay stubs?
Chances are, you've let them accumulate in part because you're not sure what to save and what to toss. Some papers are vitally important -- especially tax-related papers and documents that are hard to replace -- and some aren't. But how do you know the difference?
"The first thing I tell people is to recycle anything that doesn't have their name on it," says June Walker, author of Self-Employed Tax Solutions and an accountant in Santa Fe, New Mexico. "That's a start."
It gets more complicated from there, however. Here's how to figure out what to keep and what to shred:
The IRS can demand to see records as far as six years back. So it's best to keep tax returns and any supporting documentation -- such as W-2 and 1099 forms, brokerage statements and real estate closing papers -- for at least seven years after the last time the documented items affected your return.
Walker recommends making a folder each for income, expenses and deductions. Throughout the year, file the appropriate paperwork in each folder. Once you've filed your taxes, consolidate that year's files into an annual tax folder. As you get your system up to speed, you can add ongoing folders for your house and vehicles.
Lacking documentation when the IRS comes knocking can lead to enormous headaches and unnecessary expense. Helen O'Planick, a tax professional in Manchester, Penn., recently worked with a salesman client who threw out his 2004 driving log -- and then got audited. The client's former employer wouldn't allow him access to old files containing the information he needed to reconstruct his records.
"He tried everything," says O'Planick, "but in the end he paid an extra $5,000, and the ordeal took up a lot of his time."