Keeping Tax Records in Case of an Audit or Collections

Preparing a tax return can be a time-consuming process. It can also generate a considerable amount of paperwork. Even if you have gone “paperless,” tax records take up space on a computer or external drive that you might rather use for something fun, like family photos or video games. How long should a taxpayer keep tax records? The simple answer is that you should keep records until all applicable statutes of limitations have expired. As is so often the case, though, the simple answer only barely scratches the surface.

What Records Do You Need to Keep?

Almost any document that you used to prepare a tax return could prove to be important down the road. This could include:
– W-2’s, 1099’s, and other forms that show income;
– Receipts, mileage logs, and other documents that show deductions;
– Documents that support any tax credits that you claimed;
– Financial statements for any businesses that you own or operate; and
– Any other documents that support information included in your tax return.

Statute of Limitations for Audits

As a general rule, the IRS has three years from the due date of a particular tax return to audit it. Many exceptions apply, of course. Some are based on the taxpayer’s own alleged conduct, while others are based on the type of information involved.

Exceptions for Alleged Taxpayer Conduct

The IRS can extend its three-year statute of limitations to six years if it believes that a taxpayer has significantly understated their income, or significantly overstated the basis of one or more assets.

If a taxpayer does not file a return, the IRS has no statute of limitations to audit the taxpayer for that year. The IRS may be able to claim that a return is invalid, and therefore not subject to any statute of limitations, if a taxpayer fails to sign it or commits certain fraudulent acts.

Exceptions for Certain Types of Information

Certain transactions or assets require additional forms. Failure to file a required form can affect the IRS’s time limit for audits.

Taxpayers who own interests in foreign corporations, for example, must file Form 5471 with their annual return. If they fail to do so, their entire tax return is open to audit by the IRS at any time, without a statute of limitations.

Statute of Limitations for Collections

Once the IRS has assessed a tax debt, it has ten years to commence an action to collect that debt. A taxpayer can voluntarily extend, or waive, the ten-year limit. This is typically a requirement for a payment plan. The IRS will suspend the ten-year limit during periods of time when it cannot pursue collections against a taxpayer, such as during a bankruptcy proceeding.

Statute of Limitations for Amending a Return

After a taxpayer files a return, they have three years to amend it if they discover an error, or if they receive additional documentation that changes the information provided in the original return.

Time Limit for Claiming Refunds

The IRS will not send a refund payment to a taxpayer until they have filed a tax return. Even after the return has been filed, the IRS might not remit the refund amount. Taxpayers have three years from the date they filed their return, or two years from the date they paid their taxes in full, to claim their refund.

If you need help with an amendment or a similar tax issue in California, the Enterprise Consultants Group’s tax advisors are available to discuss your rights and options. Please contact us online or at (800) 575-9284 today to see how we can assist you.

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