Most people believe that the IRS can chase you until your dead. That is to say, if you owe money, they can go after you forever. And with regard to an audit, you can be examined at any time for any year. Neither belief is true. The IRS is governed by a statute of limitations in all its actions, including the power to audit a return. Understanding this statute of limitations in the contexts of tax
audits tells us how long you must keep your records for a particular tax year.
According to code section 6501, the IRS must make a tax assessment within three years of the date the return is filed. The
IRS is generally precluded from examining a tax return after three years from the date of filing. For example, suppose you filed your 2011 return on time on April 15, 2012. The IRS had until April 15, 2015, to examine it and make an assessment of additional taxes. After April 15, 2012, the 2011 return is considered a “closed year.” It can be examined only under especially extenuating circumstances, addressed below.
What Starts the Clock?
First I examine important rules that apply when determining the starting point of the three-year limitations period.
- The return must be complete. The return must disclose gross income, deductions and taxable income in such a manner as to enable the IRS to determine its correctness. A return that does not disclose information from which a tax can be computed is not a return. That does not mean the return must be perfect, if that is even possible. The return need only evidence an honest and genuine attempt to comply with the law. Inadvertent omissions or inaccuracies do not suspend the statute of limitations.
- Returns filed early. Code section 6501(b)(1) provides that returns filed before the April 15 filing deadline do not trigger the three-year period on the date filed. Rather, the limitations period begins to run on the due date of the return. So for example, if you filed your 2010 return on January 31, 2011, the statute of limitations began to tick on April 15, 2011.
- Returns filed late. Conversely, for late-filed returns, the statute of limitations starts on date the IRS receives the return. Thus, if the IRS received your 2010 return on July 15, 2011 (without a valid filing extension), the statute of limitations expires on July 15, 2014.
Exceptions to the General Three-year Period
Let’s now turn our attention to the various exceptions to the general three-year limitations period. In some circumstances, the period is merely extended. In other situations, the period of limitations is suspended.
This section of this article is found in the August issue of Pilla Talks Taxes. There are eight exceptions discussed in detail.
So, What’s the Answer?!
After this discussion, you might find yourself saying, “okay, fine. I still don’t know how long I need to keep my records.” The short answer is that given the three-year and six-year rules discussed above, I recommend keeping your records for six years from the date your return is filed, or seven calendar years from the year in question. Thus, your records for tax year 2010 can probably be
destroyed after December 31, 2017.
That said, you need to keep in mind the exceptions discussed above, most notably, the exception for carry backs. A given
year will remain open longer because of carry backs that might otherwise be the case.
In addition, I recommend you keep a signed copy of your Form 1040 along with proof of mailing or e-filing indefinitely. Remember that the IRS can audit a tax year at any time if you return was filed. If challenged by the IRS, you would have to prove you filed a
return, thus starting the clock on the application statute of limitations.
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