As for record retention, many people feel
safe about destroying receipts and back-up
data after six or seven years. However, never
destroy old tax returns. Keep copies forever.
Also, do not destroy old receipts if they relate to basis in an asset.
For example, receipts for home remodeling 15 years ago are still relevant, as long as
you own the house. You may need to prove
your basis when you later sell it, and you will
want to claim a basis increase for the remodeling 15 years back. For all these reasons, be
careful and keep good records.
Ten years to collect
Once a tax assessment
is made, the IRS collection statute is typically 10 years. This is the basic collection
statute, but in some cases that 10 years can
essentially be renewed. And there are some
cases where the IRS seems to have a memory like an elephant. For example, in Beeler
v. Commissioner, 2 the Tax Court held Mr.
Beeler responsible for 30-year-old payroll
An audit can involve targeted questions and
requests of proof of particular items only.
Alternatively, audits can cover the waterfront, asking for proof of virtually every line
item. Even if you do your best with your taxes, taxes are horribly complex.
Innocent mistakes can sometimes be interpreted as suspect, and digging into the
past is rarely pleasant. Records that were at
your fingertips when you filed might be buried or gone even a few years later. So the
stakes with these kinds of issues can be large.
Tax lawyers and accountants are used
to monitoring the duration of their clients’
audit exposure, and so should you. It pays
to know how far back you can be asked to
prove your income, expenses, bank deposits
and more. Watch the calendar until you are
clear of audit. In most cases, that will be either three years or six years after you file.
ing those names over, the statute of limitations clock for all of those clients is stopped.
Another situation in which the IRS statute is tolled is where the taxpayer is outside
the United States. If you flee the country
for years and return, you may find that your
tax problems can spring back to life.
State tax statutes
Some states have the same
three- and six-year statutes as the IRS. But
some set their own time clocks, giving themselves more time to assess extra taxes. In
California, for example, the basic tax statute
of limitations is four years, not three.
However, if the IRS adjusts your federal
return, you are obligated to file an amended
return in California to match up with what
the feds did. If you don’t, the California
statute will never run out. Plus, as in most
states, if you never file a California return,
California’s statute never starts to run.
Some advisers suggest filing non-resi-dent returns just to report California source
income to start California’s statute. There
can be many tricky interactions between state
and federal statutes of limitations.
The statute of limitations
is sometimes about good record-keeping.
Even being able to prove exactly when you
filed your return, or exactly what forms or
figures were included in your return, can be
critical. For that reason, keep scrupulous records, including proof of when you mailed
The difference between winning and losing may depend on your records. The vast
majority of IRS disputes are settled, and
getting a good or mediocre settlement can
hinge on your records too. The statute usually begins to run when a return is filed, so
keep certified mail or courier confirmation.
If you file electronically, keep all the electronic data, plus a hard copy of your return.
The IRS may
contact you about
two and a half years
after you file, asking you to
extend the statute of limitations. The IRS
will ask you to sign a form extending the
statute. It can be tempting to relish your
power and just say no, as some taxpayers do.
However, saying no to the IRS in this context is often a mistake.
It usually prompts the IRS to send a notice assessing extra taxes, without taking the
time to thoroughly review your explanation
of why you do not owe more. The IRS may
make very unfavorable assumptions. Thus,
most tax advisers tell clients to agree to the
You may, however, be able to limit the
scope of the extension to certain tax issues,
or to limit the time (say, an extra year). You
should seek professional tax help if you
receive such an inquiry. Get some advice
about your particular facts.
Statute of limitation issues come up frequently, and the facts can
become confusing. As but one example,
consider what happens when an IRS notice
is sent to a partnership, but not to its individual partners. The audit or tax dispute
may be ongoing, but you may have no personal notice of it.
You might think that your statute has
run and that you are in the clear. However,
the partnership tax rules may give the IRS
extra time. Also watch for cases where the
statute may be “tolled” (held in abeyance)
by an IRS John Doe summons, even though
you have no notice of it.
A John Doe summons is issued not to
taxpayers but to banks and other third parties who have relationships with taxpayers.
You may have no actual notice that the
summons was issued. Yet it can extend your
statute of limitations.
This can occur if a promoter has sold you
on a tax strategy. The IRS may issue the promoter a summons asking for all the names of
his client/customers. While he fights turn-
1. 132 S. Ct. 1836 (2012).
2. T.C. Memo. 2013-130.
How Long Can the IRS Audit?