Tax records you can toss

You, on the other hand, have more sense -- I hope. You know that within two weeks of your bonfire, the IRS is going to demand exactly those documents you burned.

So, what information do you have to keep? And how long do you keep it?

Let's start with your magic shield of absolute protection from the Internal Revenue Service -- the statute of limitations. This limits the number of years during which the IRS can audit your tax returns. Once that period has expired, the IRS is legally prohibited from even asking you questions about those returns.

The concept behind it is that, after a period of years, records are lost or misplaced, and memory isn't as accurate as we might hope. There's a need for finality. Once the statute of limitations for a certain year has expired, the IRS can't go after you for additional taxes. But you can't go after the IRS for additional refunds, either.

How the 3-year rule works

There are some exceptions :

• If you don't report all your income and the unreported amount is more than 25% of the gross income actually shown on your return, the limitations period is six years.

• If you've claimed a loss from a worthless security, the limitations period is extended to seven years.

• If you file a fraudulent return or don't file at all, the limitations clock never begins to run. The IRS can, in fact, get you at any time.

If you're deciding what records you need or want to keep, you have to ask what your chances of an audit are. A tax audit is an IRS verification of items of income and deductions on your return. So you should keep records to support those items until the statute of limitations runs out.

Assuming that you've filed on time and paid what you should, you have to keep your tax records only three years. But some records have to be kept longer than that. Remember, the three-year rule relates to the information on your tax return. But some of that information may relate to transactions more than three years old.

Here's checklist of the documents you should hold on to.

Capital gains and losses

So you don't want to throw these records away until after you sell the securities. And then if you're audited, you're going to have to prove those numbers. So you'll need to keep those records for at least three years after you file the return reporting their sales.

Congress has talked about requiring brokerage houses to report cost-basis information to the IRS. But until they do, you have to keep the records. Even after it becomes law, you'll still need to hold on to records of purchases prior to the law's taking effect.

Tax returns

How long do you keep a tax return? I recommend my clients keep tax returns for seven years .

Expenses on your home

It's just good practice, even though most homeowners won't face any tax problems. That's because profit of less than $250,000 on your home ($500,000 on a joint return) may escape taxes under a 1997 tax law.

If the profit is more than $250,000 ($500,000 on a joint return), or if you don't qualify for the full gain exclusion, then you're going to need those records for another three years after that return is filed. Most homeowners probably won't face that issue, but better safe than sorry.

Business records

Yes, that is a long time to hold on to receipts. But you may need to validate those numbers.

Employment, bank and brokerage statements

Don't even think about dumping checks, receipts, mileage logs, tax diaries and other documentation that substantiate your expenses until the statute of limitations has run.

If you have a Social Security question

You will need to keep some records for Social Security purposes. So check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If they're wrong, you'll need your W-2 or copies of your Schedule C (if self-employed) to prove the right amount. Don't dump those records until after you've validated those contributions.

You can confirm your payments and estimate your future benefits by filing Form SSA-7004 with the Social Security Administration.