We get this question a lot, how long do you need to keep documentation related to your financial and tax records?
3 Years in Most Cases
In most cases the IRS can audit a return 3 years after the due date or the date it was filed, whichever was later. Three years is generally considered adequate time for the IRS to audit a taxpayer and in straight forward cases this is the timeline they are limited to. However, it can be extended.
6 Years for Understatement of Income
If the IRS thinks that there may be a substantial understatement of income on the return the IRS can extend the statue of limitations for an audit from three years to six years. This is generally thought of as understating gross income on the return by at least 25%.
Special Circumstances Extend the Statue
Certain complex scenarios on a tax return can also extend the 3 year statue of limitations on an audit. These include errors in calculating the basis of an asset and foreign earned income, foreign tax, and foreign assets.
Forever if You Didn't File or Filed a Fradulent Return
If a fraudulent return has been filed or no return has been filed at all the statue of limitations is unlimited. This is one of the reasons we recommend filing a return even if it is not required. As long as the return is accurate it can start the statue of limitations and prevent an audit years down the road when you may have to jump through hoops to get your records.
Keeping your records at least 7 years. You also want to keep an eye out for scenarios where the statue of limitations may be extended. These situations generally happen when the return is in examination (in other words its being audited). There are certain scenarios that may extend the statue of limitations for examination, in some cases the IRS may ask you to agree to extend them. If you are in this scenario we recommend retaining representation to advise you on the best approach. If you are able to you may want to scan your records and store them on a flash drive or other device. While it's rare we have seen the IRS go back beyond 6 years. Having records in that event is invaluable.