Let me ask you a question. What do you do with all of your receipts, statements, and calculations after you’ve filed your return? Hopefully you keep them, but many people simply throw them away after they’ve completed their tax returns. Why? Because they’ve never been audited. While I hope that you never get audited, knowing what the IRS actually says about retaining documents is good to know.
Internal Revenue Code Section 6001 states:
“Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.”
Basically, keep any document that supports your tax return just in case the IRS audits you or a company that you have an ownership interest in. This means maintaining support for amounts as menial as your cell phone bill to amounts as complex as historic tax credit calculations. Makes sense. But, can the IRS expect taxpayers to keep these documents forever? The answer is no. There are a statutes of limitations that the IRS must abide by.
3 years – In general, the statute of limitations for an audit of your tax returns is 3 years from the date the tax return was due or filed, whichever is later.
6 years – If the IRS identifies a substantial error, they can extend the statute of limitations for additional years, which usually doesn’t surpass 6 years. Examples of substantial errors includes substantial overstatements of income or basis.
Indefinite – If the IRS identifies fraudulent activity, that you never filed a return, or that you didn’t file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, your entire tax return remains open for audit indefinitely or until the proper forms are filed.
Because of these statutes of limitations, the IRS tries to review returns as soon as possible, usually only auditing returns from the most recent two years. To be on the safe side, keep your support for 6 years if you file on time. And if you don’t file on time, may the IRS gods be with you.