The fear of heights, spiders and snakes all make the top ten phobias, missing from any list is the anxiety of an IRS audit. As long as I’m on a stable surface, heights have never been a problem and frankly I find snakes a bit fascinating but spiders, well we won’t go there. The concern of receiving an IRS envelope announcing an audit is one foreboding scenario we would all like to do without. Even the most prepared individual will get a knot in their stomach, if not just for the inconvenience that the audit will bring. For someone who is not prepared or for those whose records are not in the best of shape, then there can be a real gut wrenching dread associated with that notice. Even with a decrease of 5.3% in the number of audits projected for 2013 returns, the IRS will still pull hundreds of thousands of individual tax returns this year. In 2012, the IRS examined 8.9% of returns with an income between 1-5 million dollars and 3.5% of returns with an adjusted income for earners between 500k to 1 million. The odds are not in your favor of being audited but there is little solace to be achieved if you happen to be one of the few.
The sole purpose of the audit is to verify or to clarify items that you have reported as income or legal deductions on your tax return. It is for this reason that a precise and orderly system of record keeping must be adopted and maintained throughout the life expectancy of an audit cycle. Below is an excerpt from the IRS website on how long to keep specific records.
The length of time you should keep a document depends on the action, expense, or event the document records. Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out.
The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax. The below information contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
- You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
- You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
- You file a fraudulent return; keep records indefinitely.
- You do not file a return; keep records indefinitely.
- You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
- You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
- Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
The following questions should be applied to each record as you decide whether to keep a document or throw it away.
Are the records connected to assets?
Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.
Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.
What should I do with my records for nontax purposes?
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.
Even if you have prepared your own return and you are facing an IRS audit, generally speaking, it is advisable to have a tax professional represent you. We at garvey & garvey llc CPAs can easily assist individuals and business owners with establishing a method that is appropriate for them so there are no unwelcome surprises when there year end tax returns are filed.