When it comes to financial documents, which should be kept, and which should be safely discarded? We sat down with Tom Imdieke, our in-house CPA, to find out.

Video Transcript:

Welcome, I’m Brad Beck with Five Star Financial Resources. We are very excited to introduce a brand-new video series called, Five Star Focus. We wanted a place where we could highlight important topics that matter to you; our clients, friends and business partners. We feel passionate about connecting with local professionals and business owners who have great expertise in their area of business.

Tax season has ended and spring is finally here in Minnesota! Now is a great time to think about spring cleaning your personal tax files and other important financial documents. Today we have a very special guest with us, Tom Imdieke. Tom is a part of our team here at Five Star Financial Resources. He is our in-house CPA. He has been in the industry for over 35 years. Thanks for joining us today, Tom!

We would like to know, when it comes to financial documents, which can I keep and which can I safely discard? Ill jump right into the first question:

When it comes to taxes, what is the general rule for retaining federal tax records?

The general rule is for three years, from the due date of the return, the date it was filed or the date the taxes were paid. That’s just the general rule, there are some exceptions to that.

Are there any exceptions to the three-year rule?

Yes, a couple of them are that you should keep your records for seven years if you are claiming a worthless security, or a bad debt claim. And 6 years if you forgot to report some of your income. That can happen by accident for the most part. Maybe you are running a business of some sort, and you forget that someone paid you a few bucks. If that’s the case, keep your records for six more years.

You need to keep them indefinitely if you know you filed a fraudulent return, which hopefully none of us are doing. But it does happen, some of it by accident, again. But the IRS can go back as far back if they want, if they think you are doing a fraudulent return.

The last thing is if you have a piece of property [like] real estate or rental property. You want to keep the [tax] records from when you purchased that until you sell it, and then an additional seven years. That includes a 10-31 exchange which some of you may have done. If you have done a 10-31 exchange, you need to keep the original property [tax records] that you did in the exchange, plus the new property’s [tax records]. Those records can be kept for a long, long time.

As the general rule we typically say it’s for three years, but as tax preparers and CPAs we suggest keeping your tax records for seven years, just because there are some things that can come up.

What can you tell us about Minnesota state tax records in terms of length of recommended retention?

With Minnesota, I would recommend keeping them an additional year from the date of the federal. The reason being, if the federal investigates your return, the state of Minnesota typically finds out anywhere from three to six months later. They can go up to a year, and they can still come back and investigate your returns as well.

And one of the last exceptions I wanted to talk about was with collectibles. It’s becoming a big market. A lot of people buy something, [and] don’t realize it’s going to be worth a lot more in the future, so they don’t keep any records on the purchase. When you purchase something like a car, let’s say it becomes a collectible. If you don’t have the documents saying what you paid for that car, they are not going to give you the cost basis on that and you are going to be paying a lot more on your taxes. So if you have any investments like collectibles, games, cards, anything [like that], make sure you keep the records from the purchase.

In terms of investment account statements, what is the recommendation for retaining these records?

Most of you now have brokerage accounts where they can calculate the basis of your investments. But some of you will have some older investments that they don’t have the cost-basis records for. For those, make sure you have the cost-basis records for up until the year you file the return, and then an additional three years.

What are some other tips you can share about organizing records and files?

Most people are under the impression that the IRS requires paper receipts [and] paper documents. The IRS, since 1997, has been asking people to actually electronically file their receipts. They would rather see it that way (in a PDF) than they would with a paper return. As you can imaging the IRS probably has stacks of paper already. They would prefer to get it electronically.

Is that true for clients in general? Can they scan those into their computer systems and then [submit] the file[s] that way?

What you want to make sure to do is get a good scanner, and scan them into your computer, and make sure you have a good back up. There are people that have been doing that and they think they have a good back up but they don’t have it [after all]. So just make sure you have a good scanner and a good back up to your system and just put them on your computer.

Well, thank you so much for being here with us today, Tom, and sharing such helpful information. I think you have given our views some piece of mind as they set to organize their financial documents. Thanks again for joining us today!

May 2022