Now that we’ve all (hopefully) sent our returns in to the government the question in the back of our minds is how long to save those tax records.
Of course there is nothing wrong with saving documents for as long as you want, but I thought I’d offer a little primer.
The main reason you would intend to save records is, of course, on the very slight chance that the government might come and ask us some questions, raising that dreaded word.. audit.
On the state level the rules vary from state to state so I’ll just be discussing the IRS. The basic rule is that they can go back three years from the date the return was due.
So for example that would mean that as of now they could go back at look at your 2009, 2010 and 2011 tax returns because they were filed in April 2010, 2011 and 2012 respectively. So at minimum you want to keep those records
But of course every rule has its exceptions and this one is no different.
The first big exception is that while the clock generally starts running on or about April 15th (or this year April 18th) it does not begin to run if you filed your return late. So if you did not file your 2007 return until October 2008 (taking advantage of an extension) then the clock on that return would not run until October 2011. The same would be true for any late filed return.
The next couple of exceptions generally do not apply but are worth remembering.
If you failed to report more that 25% of your income then the IRS can go back six years instead of three, so that would mean in addition to being able to look at your 2009, 2010 and 2011 returns they could bring in 2006, 2007 and 2008 (since the 2005 return would have been filed in April 2006).
If you committed outright fraud of some kind then there pretty much is no limit, the IRS can go back as far as it wants.
Now the good part about these two exceptions is that they do not get applied very often. From what I understand the new IRS rules require a manager to approve going back the extra three years under the 25% rule, so it’s not likely that the IRS would do so unless they were already looking at some newer return.
Similarly the fraud rule puts the burden of proof on the IRS, so again unless they have pretty good evidence they aren’t going to apply this either.
In addition since both exceptions require extra work, the odds are unless you are one of those evil old rich people they probably won’t bother going back because it would just not be worth the time and effort.
So now that I’ve discussed the exceptions that extend the time frame, what about those than shorten it ?
Officially there are no such exceptions. The IRS can go back three years and that is pretty much it.
But there are again some practical considerations for the IRS to take into account.
Again, I do not have first hand knowledge, but from everything I’ve read the general rule is that the IRS likes for any audit to be completed at least 6-12 months ahead of time because they want there to be sufficient time for an appeal to take place.
That is because when the rules say they have 3 years to review or audit your returns, that means they have 3 years to take care of the whole process, including any appeals you may make. If the appeal cannot be finished prior to the end of the statute of limitations then the IRS stands to lose on technical grounds.
So for that reason the IRS tells all auditors to try and be done 6-12 months ahead.
Because they need time to run the audit, the auditors themselves usually want to start their process 6-12 months ahead of their own deadline. So we now have 12-24 months of time.
This means that you can probably assume that if you are going to hear from the IRS that you will probably hear from them about 18 months prior to the official deadline, or within 18 months of when you file. You could call it 12 or 24 months but splitting the difference gives you 18 months.
Of course the 18 month rule is unofficial, you should presume 3 years.
And of course the obvious advice that you should never cheat goes without saying, all of the above assumes that there is simply some minor confusion that you can clear up quickly.
Which is actually how most audits go, in general unless you know you’ve done something wrong then the odds are you won’t have a big problem.