Dear Liz: I'm drowning in tax paperwork. I have no idea what documents I need to keep and what I can toss, so I hang on to everything. Help!

Liz Weston's latest book is the 10 Commandments of Money. — Art Streiber

It sounds like your file cabinet is a fire hazard. Now that tax season is over, let's unpaper your life. The IRS accepts electronic documents, so there's no reason to cling to dead-tree versions of your data.

Most financial institutions dislike mailing you statements as much as you hate storing them. So start downloading monthly statements or — even better — let the institution store them. Some let you access files online dating back 10 years, though you may face fees to retrieve older information. Ask your financial institution about its policies.

To create digital versions of your existing records, you can buy an all-in-one scanner/copier/fax machine for $100 or so. Scan forms that verify your reported income (such as your W-2 or a 1099) as well as tax-related receipts and financial statements from the past three years. If you store scanned documents on your computer, create backups: Copy your records to CDs or a USB drive and keep them in a safe-deposit box, or use an online storage service such as Mozy or Carbonite for as little as $50 a year.

Not comfortable going paperless? You can still thin out your records. You should keep your tax returns indefinitely (you or your heirs may need the info), but you can shred supporting documentation after three years, when the risk of an audit is reduced.

When to pitch tax documents

Your greatest risk of an IRS audit is the three years after a tax return's due date, so keep records for your 2010 return until at least April 2014. The IRS can extend that span by three years if it suspects you underreported your income by 25 percent or more (there's no time limit if you're suspected of fraud). Keep records for an asset, such as a home or stock, for as long as you own it plus three years (seven years if you claim a deduction for a worthless security). Store W-2 forms until you begin receiving Social Security benefits.