How Long Should I Keep My Records for an IRS Audit?
Even if every deduction you've claimed on your taxes is legitimate, can you prove it? If you're one of the taxpayers the IRS audits, you could find yourself having to explain not only this year's 1040 but deductions from past years you may no longer remember. Keeping accurate records of business or personal deductions is essential, but getting rid of records when they're not needed can save a lot of space in your files.
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Significance
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If the IRS wants an audit, that doesn't mean you're suspected of fraud. The IRS audits 1.5 percent of returns a year, the World Wide Web Tax website states, targeting the kinds of taxpayers --- high-income, or with a lot of deductions --- that experience shows are most likely to come out of an audit owing taxes and penalties. That doesn't necessarily mean fraud. Auditors know it's possible to make an honest mistake. In cases of error, you'll still have to pay but the penalties are less than with fraud.
Time Frame
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The IRS is governed by a statute of limitations, the agency states online, limiting how far back it can audit you. In most cases, the IRS has three years to check for additional taxes; if all you're doing is filing a 1040EZ and claiming the standard deduction, you can shred your returns at that point. If you've claimed a loss from a worthless security or bad debt, however, the IRS can go back seven years.
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Warning
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If you've fudged your returns, it pays to be more cautious. For example, if there's a year you didn't file, or the IRS discovers your return was fraudulent, there's no expiration date on the agency's power to audit you. If the IRS finds that you've under-reported your income by 25 percent or more, it can look back as far as six years. The more deductions and expenses you can document from that far back, the less the IRS can hassle you.
Considerations
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In some cases, the IRS states, you should hang on to your records a lot longer. If you have assets such as real estate, for example, you'll need records as long as you own it, to figure out amortization, depreciation and any capital gains taxes due when you sell. Once the asset is off your hands, hang onto the records until the statute of limitations for the year you sold it has expired.
Misconceptions
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If you've lost records that you need, that doesn't mean you can't claim a deduction, the U.S. Chamber of Commerce website states. If you can show you drove out of state for a business trip, you can reconstruct the mileage to figure out the travel deduction. If you can show you bought software or office furniture or supplies, you may be able to figure out how much they cost you even without a receipt. If the deductions are reasonable and your reconstruction is plausible, that may be good enough for the IRS.
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