The Theory
One of my favorite blogs described the scene of an estate sale for a commercial artist. While much of the late artist’s art was being sold off, including a piece that remained unsigned (potentially his last work before death?), lying around were boxes and boxes of old tax forms and receipts of sales going back decades. The blog author described how this is often all that’s left of people when they pass away, not to be morbid or depressing, but simply to emphasize the need to live your life.
But this also sparked some ideas in my own head: why do people hold onto taxes for decades? Sometimes, when you own a business, you need to keep records going back longer than usual, but I think a lot of this is fear, and a hesitation to deal with the ugliness of records in general.
Conservatives in particular, I believe, tend to hold onto these records, in case uncle Sam tries to screw them over or something like that. Regime change, collapse! They got Al Capone on tax evasion, right? I jest, but hoarding records really does happen.
For a few years I worked with Nepalese refugees from Bhutan, and years later I read a detailed monograph on the history of that conflict, which was very much related to property rights and ownership. Many of these families held onto their proof of land ownership and farming contracts and records, establishing a right to the land. But the Bhutanese government, in trying to rid them from the country, enacted many crazy schemes to undo this. While it could be argued that those papers do a great deal to prove to the international community that these ethnic Nepali’s had every right to live in Bhutan, the papers were often confiscated and destroyed, and either way, people were still forced out of their land unfairly. Paperwork only accomplishes so much in the face of Eminent Domain, both literally and figuratively.
Here in the U.S., nobody really cares. As long as Uncle Sam gets his pound of flesh from your earnings, there isn’t much value going after your average Joe for more money, which is why the IRS emphasizes keeping 3 years of records, and 7 at most, maybe more for businesses, and maybe more if you’ve had to file bankruptcy. I forget.
I really hate paperwork, so I decided last week to digitize my records. I had done some of this before, but it was time to finish the job and clear house. (In case you’re wondering, the Brother DS-740D is a two-sided portable scanner, and it’s amazing)
For two years in a row now I’ve filed my taxes manually using the IRS’s Free Fillable Forms website. I do this because, as the name implies, it’s free. It does require some knowledge of taxes, and does NOT have a step-by-step guide walking you through every possibility the way popular software does, but if you know what you’re doing, it’s pretty good. Doing this has really taught me how important it is to have access to every form that I receive, and while popular software packages are better at telling you this, I find myself simply preferring a strong organization system for quick reference.
The Process
First of all, most of your forms can be accessed online. Your company likely has a way for you to download your W-2, your brokerage account will have your (often Consolidated) 1099, your HSA provider will have your 1099-SA, etc, etc. Having a copy of these files in PDF is usually much more efficient than scanning the files manually, but some of these forms may only be available for limited periods of time, so it’s important to download them while you have the chance. If the form is no longer online, you’ll need to scan it to convert it to pdf.
What I do is create a folder on my operating system for each year (2020, 2019, 2018, …), and I place all relevant files in their appropriate folder.
I use a particular naming scheme, too:
Year_Form[_Provider].pdf
So for example, I might have
2020_1099-SA_Fidelity.pdf
or
2020_1099_Consolidated_Vanguard.pdf
This allows me to see everything for a particular form in descending order of importance. You might think that the year can be omitted from the name since the folder is already named after the year, but this is deceptive, as I’ve occasionally saved files in the wrong folder or found myself copying them from my Downloads with the default, unhelpful names assigned by the websites I downloaded them from. Whereas organization is important for finding the file, the file name itself should immediately convey all of the information you need.
After I’ve download or scanned all of the files for a year and organized them appropriately, I use a program like 7Zip to compress these into an archive, which I encrypt with a password. So in my 2020 folder, I will then have an encrypted file called “2020.7z”. This file I put on the cloud, which would probably be a Google or Apple account for most people. The cloud is often pretty secure, but one of my friends had some creepy, suspicious messages left on their drive one time. It’s also possible to accidentally save something in a folder you’ve shared, so I prefer to use encryption just in case. Just don’t forget the password!
Whenever something is modified, added, or removed, I simply highlight all the files again, create an encrypted zip of them, replacing the old zip, then replace this on the cloud with my new version.
If you really want, you could delete the raw files at this point, and simply rely on extracting the archive first when making changes, but I haven’t felt this is necessary for me. Your computer could always get hacked, I guess. Physical files can always be stolen, too. Storing on the cloud is for redundancy, but as far as hiding your records, I dunno, you have to assess your personal risk. You typically need your prior year’s AGI to file your taxes, so maybe your most recent AGI is the thing to protect the most, but I don’t spend any time worrying about this, personally.
The Outcome
I’ve got to tell you, it’s really nice! I do keep physical copies of my W-2s, because they all have the same format and are easy to hold onto, otherwise the rest gets shredded. I do like to have a print out of my Federal and Colorado returns for the immediate prior year for reference, and some other miscellaneous files, but the clutter is drastically reduced. Computer files do a great job of glossing over the great differences in physical appearance, so I love having the names be so explicit – I don’t have to dig around for anything this way.
Remember: you’re really only keeping these files in case you get audited. I’m not a CPA or anything, but it’s my understanding that these files really mean nothing if you don’t get audited, and as long as you’ve done your due diligence, what are you so afraid of? I don’t know why people get so attached to such paperwork, but it does take a lot of motivation to digitize everything. Even just going back a few years took me hours, but it also took me awhile to settle upon a good methodology. Now that I feel I have a good methodology, I think future years will be much easier.
And if you’re tempted to keep these records forever because they are so easy to store electronically, I’d encourage you to reconsider. There’s enough junk on my computer, personally, the last thing I need is to hoard tax documents on it, too. Besides, these can potentially be a liability, increasing potential outlets for your information to be stolen, if you’re really concerned about that. Follow the IRS guidelines for how long to keep records for your particular situation, and get rid of everything else! Life is too short to dedicate so much space, physically or otherwise to this crap.
As one final note, I’d like to say that I think there’s value in keeping your taxes simple. Nobody wants to leave money on the table, sure, but it’s nice having one HSA to deal with and not three, for example. I was also very excited to avoid filing Schedule D this year, since I had no individual stocks to sell, didn’t sell any of the index fund shares I have in my taxable account, and keep the vast majority of my investments in tax-sheltered retirement funds. I strategize to avoid bureaucracy.