By Ray Martin, CBS MoneyWatch

NEW YORK (CBS) – Recently a client asked me how long she should keep her tax returns and related records. Here is my advice:

One Year

Hang on to monthly statements of financial accounts unless each new statement shows the cumulative activity for the year (which is typical for mutual fund and mortgage statements). Since most banks no longer return your cancelled checks, hold the pages that include copies of checks that were for deductible expenses because these provide proof of payment and should be stored with that year’s tax return. Keep all paycheck statements until you’ve reconciled them with the year-end statement, your W-2 form and your 401(k) plan statement. After you receive your W-2 form, and checked it against the last pay statement for the year, you can shred and discard all paycheck statements. Monthly investment account and quarterly retirement plan statements can be shredded and discarded after you’ve reconciled them with the year-end statement.

I prefer to use a cross cut shredder to destroy any financial documents that contain personal and confidential information such as your name, address, date of birth, Social Security number, account number, etc.

Three Years

Keep your federal and state income tax returns and related receipts and statements for at least three years. If you are audited, the IRS reserves the right to review tax returns filed during the period of limitations, which is generally the past three years, which includes requesting to see supporting documentation for the income and deductions you reported. Therefore, generally you will need to keep your 2008 tax return and related papers until you file your 2011 tax return. It is generally safe to shred and discard it if after that, unless a situation described below applies to you. See IRS Publication 552, Record keeping for Individuals.

And if you are reluctant to destroy these because you think you might need a copy of your tax return for some reason, you can always request a transcript of your tax return from the IRS.

Six Years

If there is the possibility that you may have underreported income by 25 percent or more, then you’ll need to keep tax returns and all related information for six years. When there is substantial activity from a closely held business or cost basis records for property or securities sold are unclear, underreporting income is a real possibility. My rule: Keep records and tax returns for years that include out-of-the-ordinary transactions (sales or donations of property) and irregular income (stock option exercises, trust income, etc.) for six years after the filing date of the return. So you can discard your 2005 tax return that includes reporting of irregular items after you file your 2011 tax return. So if the IRS hasn’t raised any issues about your tax returns from 2004 and prior years by now, then it should be safe to shred and discard them.

Seven Years

Keep any tax return and documentation that includes a claim for deducting worthless securities for seven years.

Life of the Asset

If you refinanced a mortgage, keep a copy of the mortgage note and the HUD-1 Settlement Statement for as long as you own the property, which is commonly referred to as the “life of the asset”. You will need to refer to the mortgage note to verify that adjustments to your interest rate are made correctly if you have an adjustable rate mortgage. The settlement statement includes any interest and points paid that may be deductible.

Keep receipts for all electronics and appliance purchases. Staple these to the warranty and store in a file for all household appliances (from the iPad to the washer and dryer). Check to make sure these purchases are covered under your homeowners or renters insurance policy.

Keep receipts for any deductible expenses and keep them in a file for preparing next year’s tax return. Keep receipts for expenses that can be submitted for reimbursement from employer provided health care and child care spending accounts.

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