Please sir, may I throw out my paper now?

Once people realize the benefits of scanning and decide to do it they usually have one last question: how long should I keep the paper after I scan it? My advice is always to get rid of the paper as soon as possible. A friend of mine who long ago found Nirvana in being completely paperless says he thinks it should be illegal to sell scanners without a paper-shredder attached.

Still, people wonder about getting rid of paper and believe there are special rules that require them to keep certain papers. Which ones? They're not sure so they tend to keep most of them—just to be sure they comply with that mysterious bureaucratic edict.

The other day I came across a weblog post entitled How To Store Your Tax Returns. Since it was on a site called Unclutterer, which offers tips on how to simplify your life, I naturally assumed the advice would be about how to store tax returns digitally. Actually, this is the advice that was offered:

Since you should actually KEEP your tax returns and associated financial documentation, you want to have a systematized method for organizing these papers. Why keep them? First of all, if you ever get audited, you’ll really want them. Secondly, in case of your death, these documents may be needed in the settling of your estate. Whatever the situation, you’ll need these in paper form and not digital scans.

Oh brother! Here we go again. The comments to this post were festooned with supporting opinions on how vital it is to keep paper receipts.

Instinctively, I knew this was ludicrous. Both from a practical standpoint, as well as a legal one.

I know about the rigors of introducing evidence and getting it authenticated at trial. Nowhere are the requirements of proving things more exacting than in a courtroom. The Best Evidence Rule requires someone relying on documentary evidence to produce the best copy available, which may or may not be the original. So what would happen if, as part of your business practice, you scanned all documents and then destroyed the 'original'? Well, you'd have to produce the "best evidence," which for you would be a print out of what you scanned. And you might have to explain the safeguards your scanning system has to ensure that the scan is a faithful replica of the original. That's if the other side objected to your document. If they didn't object, and they probably wouldn't unless there was a real issue about authenticity, then the whole issue of scanned documents versus paper originals wouldn't even come up.

And if that's not comforting enough then consider this: recently, the federal courts adopted e-filing, which allows attorneys to upload PDF copies of pleadings instead of filing paper. These pleadings are important records, which the court is certainly required to keep for as long as the case is pending and even longer. So does the federal court require the attorneys to also file the paper originals? No, it does not. The PDF copies are considered the originals.

But what about the IRS? Isn't the Unclutterer article right about the IRS requiring you to keep paper copies of receipts and supporting documentation related to your tax returns? No, the IRS doesn't require paper copies. And if you don't believe me then read IRS Rev Proc. 97-22, which specifically allows electronic storage systems if they meet basic requirements of reliability. And here is another link to resources that support keeping important documents in digital form.

Obviously, there are some documents that should be kept in original form. Promissory notes are one thing that comes to mind. Generally, you need the original promissory note to cancel a mortgage once the note has been paid off. But, in Louisiana at least, you can even get the mortgage cancelled if the note is lost. It's not easy, but it can be done. In short, it's okay to err on the side of caution but do yourself a favor and be practical. Keeping paper just because some vaguely imagined legal authority might ask you for 'an original' is not the way to organize your life.

Unless you enjoy clutter and confusion.

Comments

[Erin @ Unclutterer]

Actually, I spoke to a tax attorney and an accountant for the advice that I gave. Both said that the letter of the law is not currently followed by field agents, and that they have both had problems in the last 12 months using digital files as evidence. They said that they believe it will take 5 to 10 YEARS for IRS field agents to be comfortable with digital files. So, even though the law states one thing, I went with the advice of people who deal with these types of cases on a daily basis.

[Ernie]

I have no doubt that there are attorneys and IRS field agents who misunderstand the law, or are extremely cautious and always suggest that the safest road be taken. But being free of clutter means making decisions that involve tradeoffs. Sure, I could keep lots of things around my house in case one day I might need them. But, that's not a path that will rid me of clutter. Dealing with notions of what is permissible or advisable presents the same challenges.

Obviously, the IRS (once it decides to challenge a taxpayer) is often going to use any means at its disposal to mount its challenge. There are all kinds of crazy people with crazy ideas, and some of them work for the IRS. Some of them are tax attorneys. The laws are not always clear. And you can decide to act based on the fear that someone with a poor notion of what the law is might make your life harder, or you can make your life easier now and deal with the senseless people later.

Here's how the law works. At the lower levels you have people who often (and the word 'often' cannot be emphasized enough; please note I didn't say 'always' or 'generally') misunderstand what the law is, or how it should be. That's why God made appeal courts. If the IRS tells you that your scanning system isn't good enough then appeal that decision to a federal court. When you do you will have your case alloted to a judge who has had to accept the notion of 'electronic filing.' As I pointed out, there are no longer (for cases filed after a certain point) paper records in cases. Every federal judge will have an inherent understanding of the idea that paper records are not required.

Now, that doesn't mean that you can just scan in a haphazard way and expect to get your records authenticated. THAT's going to be the real problem for some people. The IRS guidelines specify how you are to keep electronic records. If you follow those guidelines even crazy IRS agents will have to accept that what you are doing is permissible. If they don't then someone up the food chain will.

But, if you are inclined to worry a lot about things that might go wrong. By all means, keep your paper. And keep lots of tools and pictures and old dresses and pants and anything that might come back in style or be useful in the future. Turn the clutter meter up to 11 and relax. It's all about holding on, whether out of fear or confusion.

[Business Attorney]

Ernie, you say, correctly, that:

"Now, that doesn't mean that you can just scan in a haphazard way and expect to get your records authenticated. THAT's going to be the real problem for some people. The IRS guidelines specify how you are to keep electronic records."

The problem is that, unlike companies with written procedures and checks-and-balances, few individuals can truly meet the IRS guidelines. The Revenue Procedure you cite states:

"An electronic storage system must include:

(a) reasonable controls to ensure the integrity, accuracy, and reliability of the electronic storage system;

(b) reasonable controls to prevent and detect the unauthorized creation of, addition to, alteration of, deletion of, or deterioration of electronically stored books and records;

(c) an inspection and quality assurance program evidenced by regular evaluations of the electronic storage system including periodic checks of electronically stored books and records; ..."

Scanning in your own return and backup doesn't satisfy any of the first three requirements. It is easy to physically alter original records. Wite-Out or cut-and-paste are two methods that would easily be exposed on an original but are virtually impossible to detect on either a photocopy or an electronic copy.

IRS agents looking for tax cheats have a very good reason to be skeptical of scanned records. The Rev. Proc. doesn't preclude them from questioning electronic copies in most instances.

[Ernie]

Okay, first of all let's distinguish between (1) storing your tax returns and (2) storing the backup receipts you'll need to support a challenge.

First, the IRS has a copy of your tax returns, so they won't be depending on you to have a copy. Second, if you file online you don't have a paper copy. It's like the e-filing in federal court. The original is what gets uploaded to the IRS. They can print out their version, and if you save your upload as a PDF (which is what I do, and what I would recommend) then you can do the same. So, in that sense the IRS guideline I cited doesn't even come into play. Not in any conceivable practical sense, anyway. You can create a law school exam scenario to make it come into play in a 'legal sense' if you like but people should be guided by practical reality, not law-school-exam hypothetical 'reality.' Or at least that's been my approach.

Now, what about the backup receipts etc.? Why wouldn't scanning in your own receipts satisfy sub-parts (a) through (c)? I interpret these provisions to mean that you make sure that the documents aren't easily altered or lost. If there is no specific explanation by the IRS of what this means then this provision is open to interpretation. You interpret it to absolutely prohibit scanning by an individual. I guarantee you there are many federal judges who would interpret this provision the way I suggest. But, you're right that the IRS might question the scanning process.

Still, you have a lot of odds on your side if you decide to scan in your information (as long as you are diligent about it). I'd say that to those who are inclined but slightly concerned (after reading your comment) to have a third party 'auditor' periodically check your records to make sure that they are 'in compliance' and then create an affidavit supporting their examination that your scanning process is reliable.

My message to people is not that their lives can be free of risk, but that risk can be managed sensibly. Even when it comes to dealing with the IRS.