Today, I would like to continue answering questions that I am commonly asked. Hopefully, the answers will save you time and money.
So, here goes:
I recently read an article in the news media that said the IRS typically can audit you for six years so you should keep records for that long.
Both statements are untrue.
The statute of limitations for an audit is generally three years after you file your return. But as a practical matter the actual statute is about two years.
The IRS must finish the audit at least six months before the three-year statute of limitations has run. That is because internally it takes at least six months to close the case and process your appellate rights.
Further, it typically takes several months to conduct an audit, which means that audits would generally begin no later than two years after you file your return.
So, the moral of that story is that once you file your return, you typically will not be audited after 24 months.
There are exceptions to this rule. The limitation period for criminal prosecution is six years. Likewise, if you omitted more than 25% of your income, the statute of limitations is also six years. Fraud cases have no limitation period. But these are relatively rare cases.
One would think three years should be more than long enough because the limitation period for audits typically expires long before then. However, there are exceptions to how long you should keep your records.
Some records need to be kept perpetually for a variety of reasons. For example, if you purchase an asset and depreciate it over several years, you may end up selling it for a profit or a loss later on. The IRS may require you to prove the original cost of that asset, so you would want to keep a copy of the original purchase price and maintain copies of your depreciation taken each year.
Another example is for businesses. In some years they may generate a net operating loss. That loss may be carried forward several years. If you are audited in one of those later years, the IRS will often require you to prove the amount of the original loss. So you would want to maintain the records of that first loss year and also the records of each later year that consumed part of that carryforward loss.
The moral of the story is this: The common misperception that the IRS has six years to audit you so you should keep records for that period of time is simply not true because the practical statute of limitations is only 24 months. Likewise, though some records may be discarded relatively quickly, there are some records that need to be kept much longer.
So, the solution to this dilemma is to get a good tax adviser, typically an accountant, and have them give you advice based upon your particular circumstances.
Folks, I hope this information is helpful and saves you time and worry.