Hang on to your tax data

Money Talk

Dear Liz: I’ve seen some writers suggest that people can destroy financial and tax information after three years. Let me tell you my story. Before my sister died, I had to take care of her finances. She had little money left but she had to go into an assisted-living facility. I had to show proof of five years’ earnings and financial statements. So please tell people not to shred or discard information after three years.

Answer: It sounds as if you were getting your sister qualified for Medicaid, the government program that covers health and custodial care for the indigent. Medicaid now has a five-year “look back” period that penalizes transfers of money or assets when people apply for coverage. The look-back period is designed to discourage people from artificially impoverishing themselves by transferring assets to others so that they can qualify for Medicaid to cover nursing home bills.

You’re right that destroying financial documents after three years may be a bit precipitous. The IRS typically has three years from the due date of the return, or the date it was filed, whichever is later, to conduct most audits. But the deadline can be extended an additional three years if the IRS believes you significantly underreported income. And certain documents need to be retained longer. That’s why many tax experts recommend hanging on to supporting documents for your tax return for at least seven years, and keeping the tax returns themselves indefinitely. You also might consider scanning important financial documentation into your computer and keeping back-ups offsite.

The good news is that many of the statements you’re likely to need can be reordered from the financial institution that originally issued them. There may be fees involved, but many banks, brokerages and credit card firms easily can provide you with statements dating back six years, if not longer.


First step to resolving debt is facing it

Dear Liz: I just got a letter from a collection agency saying I owe a phone carrier $498 for an ISDN line I thought I had terminated two years ago. I had no idea about this outstanding amount because we moved and the carrier didn’t get my forwarding address. I can’t find any hard evidence that I closed the account, and so much was going on then (I was expecting our first child, my father was dying and our landlord decided to sell the apartment) that I’m terrified I could have screwed up. We are otherwise always responsible with money. I’ve been too scared to check my credit reports, but I dread to think what this has done to my credit scores. I’m in a position to pay in full immediately, but I want to try to have this expunged from my credit reports if I can do so. My other concern is that if Verizon doesn’t think I terminated the account, could it have been billing me all this time? Is it the tip of the iceberg?

Answer: The chances are slim the carrier continued to bill you after turning this account over to collections. So your first assignment is to pull your head out of the sand and see whether this collection account has appeared on your credit reports. Torturing yourself with worry about what’s happening to your credit is worse than simply knowing. Go find out.

Once you do, and you realize you’re still breathing, you can get started on the next steps.

Understand that you may well not owe this debt. Plenty of people have been dunned for accounts that were properly closed and paid in full. That’s why it’s so important to hang on to your last statement, showing a zero balance, from any creditor, utility or other biller — it can quickly short-circuit bogus debt collection efforts.

You’re not out of ammunition because you don’t have your last statement, however. Federal law requires the collector to provide proof, once you ask for it, that this is actually your debt. Make your request in writing and send it certified mail, return receipt requested. If the collector can’t provide such proof, it’s supposed to stop collection attempts and delete any mention of the debt from your credit reports.

If the debt is yours, you can begin negotiations to either delete it from your credit reports or prevent it from showing up, if the collector has yet to report it. Get the collector’s promise in writing before you send any money.

Liz Weston is the author of “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via Distributed by No More Red Inc.