Understanding the IRS Audit Period and Record Keeping Requirements

The Internal Revenue Service (IRS) has specific guidelines regarding the period in which they can audit your tax returns and the length of time you should keep records. The details can seem complex, but understanding these regulations can help ensure compliance and avoid unnecessary complications.

IRS Audit Period

Generally, the IRS can audit your tax returns for the previous three years. However, there are specific circumstances under which they can extend this period:

If there is substantial understatement of taxable income, the statute of limitations is extended to six years. If fraud is suspected, the IRS can investigate as far back as they believe is necessary, with no upper limit.

For instance, if errors identified in the initial audit periods continue into the current or following years, the IRS might extend the audit period up to five or six years.

Record Keeping Guidelines

The Internal Revenue Service provides detailed guidance on record retention. They recommend maintaining records for the following periods:

For returns filed within the last three years, the IRS can include them in the audit. Additional years can be added if a substantial error is identified. In cases where a substantial error is found, the IRS will not go beyond six years in their audit period. For clients, it's recommended to keep records for 7 to 9 years, with a particular focus on keeping crucial documents like actual return statements and income statements (W-2, 1099, etc.) indefinitely, as these documents are crucial for future reference.

When it comes to determining the cost basis of a capital asset sold, record retention guidelines extend to 7 to 9 years post-sale. This is to ensure accurate and transparent calculations for capital gains or losses.

Additional Audit Information

According to the IRS, less than 1% of taxpayers are audited. Although the overall number of audits has been trending downward, business audits are increasing. As of February 23, 2016, this trend was notable.

It's worthwhile to note that for fraud cases, there is no statute of limitations. This underscores the importance of maintaining accurate and thorough records to avoid fraudulent claims.

Conclusion

Understanding the IRS audit period and proper record retention is crucial for tax compliance. By following the guidelines provided by the IRS and keeping essential records for at least 7 to 9 years, you can help minimize the risk of audit challenges and ensure accurate tax reporting.