By Jack Krumeich-Miller, E.A. | November 21, 2018
When I first began preparing tax returns for friends and family, it was all done on paper. It was all mailed in. It was all physically saved in filing cabinets. And, I was always told I could shred anything after 3 years. However, that is not exactly true.
Now it can all mostly be done electronically. Aside from certain forms and IRS and State Department of Revenue notices, I can handle my tax work from my computer. No more pencils, no more grabbing blank forms from the high school library.
One of the first things I learned when I started doing more tax returns than just friends and family was how important it is to keep every single document or copy of documents that comes my way. I also began informing my friends and family to keep their documents for at least three years. I say “at least” 3 years because that is not the only amount of time the IRS can request them or dispute your tax return or tax situation. They can take action at any time for several different reasons. If a taxpayer does not have the documents needed to properly respond to the IRS, they can assume they were right and move forward with whatever steps are within their power to collect.
There is a term − statute of limitations − which is the allowance of time given for the IRS to act. The IRS has three years from the time your return was filed to act against your return for matters related to clarifying discrepancies between what they think you owe and what you claim you owe. If they suspect tax fraud, the statute of limitations can be six years from the last act committed, not from the period the tax fraud began. There is no statute of limitations if the IRS suspects you filed a false tax return; you did not file any tax return; or you committed a willful effort to evade paying taxes owed. And remember, it is not a matter of if you committed any of these offenses, it is a matter of whether or not the IRS suspects you did.
The IRS also has a Whistleblower program where anyone can direct their attention to potential questionable tax activity. Anyone could feel motivated to call the IRS with any number of accusations and, with their incentives for a successful recovery of taxes owed to them, the IRS will investigate.
Collection of your tax debt involves a separate statute of limitations. Currently, that limitation is 10 years from the date of the last assessment of tax debt. If you owe one year, and then seven years later, owe an additional amount from another tax event, they start the collection clock over from the most recent debt assessed. If you file bankruptcy or begin the process of applying for a payment plan, or any number of events that put a pause to the IRS collection efforts, it pauses the clock on the 10-year statute of limitations. When the event ends the IRS can begin collection efforts again and the statute of limitations clock picks up right where it left off. The IRS can also file for judgment, and when judgment is awarded, they can renew the judgment and start the clock over again.
While there are technically time limits for the IRS to act, it doesn’t mean they won’t try another avenue to investigate your tax situation. To me, there are fewer reasons to shred your documents after three, six or ten years than there are potential reasons to keep them as long as possible. Thankfully, with today’s technology, document retention is much easier, faster and less expensive than ever before. These services offer protections from data breaches, file deletion, or damage to your hard drive. Maintaining your tax documentation is important, and even though it is often felt three years of retention is adequate, the IRS has many opportunities to request data further back than that. I strongly recommend you digitize and store your tax filing documents for ten years minimum – just to be on the safe side!