So, I get asked often, “How long should I keep my tax records?” My standard answer is… “Minimum of 3 years, better is 6 years.”
Normally, the IRS has 3 years to audit a tax return. BUT, there is an exception. Isn’t there always an exception? IF you underreported your taxable income by 25% or more, the IRS has up to 6 years to audit your return.
So let me give you a horror story scenario. Let’s say you reported all your income correctly and it is now 5 years since you filed that return. But, the IRS obtained some information that caused them to think that you underreported your income by more than 25%. They audit that now 5-year-old return, but you threw all your documents away after 3 years, thinking you were safe. Without documentation, the IRS can now disallow everything, and you will be hard pressed to prove their assertion wrong. Sure, you could still recreate some information from bank statements and credit card statements that you obtain (usually at a price) from your providers, but without original receipts and other documents, it can come down to your word against the IRS.
Now, if you happen to be a taxpayer who didn’t report all your income on purpose, and actually did underreport your taxable income by 25% or more, heaven help you if the IRS figures it out. In today’s economy, there are so many different electronic markers the IRS has reported to them in various ways. Unless you are dealing 100% in cryptocurrency, you most likely will get caught.
Why do you think the recent news about Congress creating new reporting rules for cryptocurrency activity is happening? The IRS isn’t as stupid as many think. They are well aware that the criminal world loves cryptocurrency, and they want to get a window into that hidden world.
So, in conclusion, if you are wanting to remove some clutter from your basement, attic or wherever you put “junk that you can’t throw away,” remember the IRS actually has 6 years if there is any chance they can come up with an argument that you underreported your income by 25% or more. If you are honest and upright, you have little to worry about, and normally, you could toss your records by 3 years, but just in case there is some false information about you that they IRS might come across, I suggest keeping those records for 6 years.
By the way, how do you get rid of old records. Shred is my go-to. There are many document destruction companies around, and they charge very reasonable rates. In this world of Identity Theft, you do NOT want to just throw stuff in your garbage can.
Did you hear? 1 Chron 19:8 says, “When David heard of it, he sent Joab and all the army of the mighty men.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.