Tax season is tough enough without the risk of identity theft. We asked the experts about what to store and what to shred so your paperwork doesn’t come back to haunt you.
Some years back, I had my identity stolen. It was an anxiety-inducing experience, and it took considerable effort to put everything back in order. While there’s no way to 100% prevent this crime from happening, there are steps you can take to minimize your risk. One is to carefully organize and dispose of highly sensitive personal and financial paperwork. As well as helping to protect your identity, it reduces clutter and makes filing returns a less stressful experience.
We asked the experts for their advice on how best to organize and store tax documents, determine what to keep, and how to safely get rid of what you no longer need so you can move into the next tax year with confidence.
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Why Is It Important to Dispose of Important Tax Documents the Right Way?
“Tax documents contain personally identifiable information like social security numbers, addresses, and employer identification numbers, so properly disposing of these documents is critical to [help] avoid identity theft and fraud risks,” Dr. Rachel Byers, Graduate Accounting Professor at Purdue University Global, explains.
According to Yuval Dan Bar-Or, a professor of finance at Johns Hopkins University’s Carey Business School, documents showing our full Social Security number (SSN) and old tax returns create some of the greatest vulnerabilities and opportunities for criminals to exploit.
“W2s and 1099s also represent fairly high risk, along with bank and brokerage statements,” Bar-Or, says. “Documents with partial account numbers, addresses, or income without SSNs can still be used by bad actors to build a false profile, but may be harder to implement.”
He explains that even pay stubs without SSNs, utility bills, or documents with old account numbers still pose some risk, as they can also be used to enhance and deepen a false profile that sophisticated fraudsters work to create.
What Can Happen If Someone Gets Their Hands on My Private Documents?
If your tax documents or other sensitive paperwork end up in the wrong hands, criminals can use your details to access your finances.
“When your SSN is exposed along with your full legal name, date of birth, employer name, signature, etc., criminals can file a fraudulent tax return in your name to claim your tax refund, impersonate you to government agencies or private sector financial institutions, draw credit in your name (credit cards, personal and auto loans, mortgages), and drain bank or investment accounts,” Bar-Or says.
Often, you won’t even be aware that fraud is being committed until you receive notice from the Internal Revenue Service (IRS) or your bank. Recovering funds or regaining access to accounts can take months and often requires filing police reports, resolving credit disputes, and dealing with IRS identity theft affidavits. The emotional toll, as well as the financial one, can be draining.
How to Organize Your Important Tax Documents
Setting up a well-organized system for your sensitive documentation reduces stress during tax season, helps keep your data safe, and makes it easier to determine what to keep and what to shred when the time comes.
Create Annual Folders
Bar-Or recommends maintaining annual folders for sensitive records. “Getting into a routine where you file sensitive items on a monthly basis can be helpful and avoids a lot of items piling up.”
For each clearly labeled physical or digital folder, separate documents by category to save you from sifting through a stack of mixed paperwork. “For example, have one file for all receipts related to job materials purchased and another for automobile-related expenses,” Byers says.
File Receipts
Don’t just assume that your credit card statement is enough evidence of proof of a purchase. It’s important to keep original receipts whenever possible. “While you may be able to prove that you spent $47.56 at Home Depot, you can’t show what was actually purchased without the receipt, and that is the level of substantiation that the IRS is looking for,” Byers says.
Also, be aware that receipts printed on thermal paper can fade over time. Byers says you can hand-write the date, amount, and company name on the back of the receipt or scan it as a backup.
Do Digital Wisely
Keeping paperwork to satisfy the IRS requirements of 3 to 7 years means you can end up needing a lot of space for the paperwork in storage. Bar-Or says that having a combination of primary digital and limited physical systems can be helpful.
Your digital system will be easy to search, backed up, and accessible from any location. However, original receipts, important signed documents, and contracts can be kept physically or scanned.
“Avoid copying sensitive documents into folders that are automatically backed up if you’re not sure the backup location is secure,” Bar-Or recommends. “Also, use consistent naming conventions for files that include descriptive categories and dates. This way, as you accumulate a large number of files, it will be easier to search through them.”
How to Get Rid of Your Documents Safely
When documents are past their retention period, if they contain identifying or financial data, never toss them straight in the trash.
Shred, Don’t Toss
Shredding documents is the safest strategy for secure disposal. A cross-cut shredder turns your documents into small confetti-like pieces, offering better protection than strip shredders.
If you have a lot of paperwork to dispose of, consider using a professional shredding service. “It’s important that the information is kept secure (in a locked bin, for example) until the scheduled shredding service,” Byers says.
Byers also notes that while some people consider burning their paperwork, municipalities have statutes that restrict citizens from doing so, and it isn’t as secure as shredding. “If a small section of a partially incinerated document contains a taxpayer name and social, and that piece floats into the air and is blown downwind, the risk for identity theft remains,” she says.
Destroy Digital Data Properly
“For digital records, make sure to delete and overwrite data, as most deleted data can be retrieved if not overwritten,” Bar-Or says. Use software that securely wipes drives, and consider physically destroying hard drives.
FAQS
How long does the IRS actually require me to keep my tax returns?
“The IRS requires taxpayers to keep income tax records for 3 years (7 years for paid preparers) from the date the return was filed or due, whichever is later,” Byers says. If you underreport income by more than 25 percent, the IRS can request to go back 6 years, and claims involving worthless securities or bad debt typically require 7 years of records. If you don’t file a return or file a fraudulent one, there is no time limit.
What documents should I never, ever throw away?
When documents are difficult to replace or carry legal significance, you may need to keep them indefinitely. This includes birth certificates, Social Security cards, original wills and trusts, notarized documents, signed real estate and business contracts, loan documents with original signatures, and certain stock certificates. If you’re unsure about a document’s importance, it’s usually safer to keep it or to consult a tax advisor before shredding.
About the Experts
- Dr. Rachel Byers, PhD, CPA, is a Graduate Accounting Professor at Purdue University Global and a practicing CPA at Byers, Byers, and Associates P.C. in Alabama.
- Yuval Dan Bar-Or, PhD, is a professor of finance at Johns Hopkins University’s Carey Business School. He has served as the academic director of the Flex MBA and dual degree programs, as well as the Executive MBA and Executive Education programs.
