How Long Do You Need to Keep Your Records and How Long Does the IRS Have to Audit You?

Do you know how long you have to keep your records in case the IRS chooses to audit you? Do you know how long the IRS has to audit you? Here are the rules:

How long does the IRS have to audit you?

* If you filed your tax return on time or with extensions and didn't commit any fraud and didn't omit over 25% of your income, you can be audited for the three most recent open tax years (these include the year you filed your latest tax return and for the two previous years). Thus, if you just filed your tax return for 2013, you can be audited for tax returns 2011, 2012, and 2013.

* If you underestimated your income by 25% accidentally but didn't commit fraud (meaning you intentionally omitted the income), you can be audited for up to six years for the years you omitted up to 25% of your income.

* If you file a fraudulent return, the IRS can audit you forever on that tax return.

* If you didn't file a tax return, the IRS can go back forever to years where you didn't file a return. Thus, you have to always be looking over your shoulder if you didn't file a tax return. This is why I recommend always filing a tax return even if you didn't make enough money to be required to file a return.

How long do you need to keep records?

* For regular receipts, such as invoices, cancelled checks, etc. you need to keep these for six open tax years.

* You must keep your tax returns and attachments for as long as the seas run dry which means forever. No wonder people are buying bigger homes these days!

* If you buy assets such as stocks, bonds, funds, precious metals and real estate, you must keep proof of purchase for as long as you own the item and for three years thereafter (actually until you file that tax return for the third year). Thus, if you bought your home in 2001 and sold it in 2014, you have to keep all purchase documents and proof of basis additions from 2001 through 2014 and three years thereafter until you file your 2017 tax return.

* Depreciable assets that you elected to write off over one year under section 179 election - you must keep proof of purchase of these assets for as long as the depreciable period exists and for three years thereafter unless you sold them before that period is over. In that case you would keep the purchase documents for three years after a taxable sale. Computers are deemed five year assets, cars are deemed six year assets and furniture are deemed seven year assets. Thus, if you elect to write off a desk and copier costing $4,000 in one year, you would have to keep the purchase documents on these items for the full seven-year life plus three years thereafter for a total of ten years.