How long should I keep my tax records?

Clients are always asking me how many years should they keep their tax records. This is a really great question and an important one that everyone should be aware of.   There is much confusion about the rule and it's because the rule is somewhat confusing.  The general rule about how long to keep tax records is that it depends.  No this isn't just another lawyer answer, it really does depend.  It depends on things like what type of record we are talking about.  It also depends on your personal tax situation - are you aggressive on your return or are you conservative on your tax return?  Maybe you fall somewhere in between.

Generally, one should keep their day-to-day tax records for at least 3 years.  Day-to-day tax records include things like DMV vehicle registration, annual medical expenses, annual mortgage interest payments, W-2 and 1099 statements, etc.

However, a client should keep records related to capital assets for the life of the asset. For example, if you own a home and make improvements to it, and have the house for 30 years before you sell it, you should keep records of the improvements, purchase agreement, closing agreement, for at least 33 years!  That's right, you need to keep those records for the entire time you owned the home plus at least 3 years after you disposed of it.

There are some more complicated rules that could apply if you take aggressive positions on your tax return.  For example, the IRS can audit you up to 6 years after you filed your tax return if you failed to report 25% of your gross income, which would constitute a "gross omission."   Also, if you are really aggressive the IRS could assert you committed fraud which would mean there is no time period limitation for the IRS to audit your tax return.  In which case the IRS could go back forever to audit your return.

In a recent case, the IRS applied the 6 year limitation period against an individual who failed to disclose income.   In this case, the individual did not disclose to the IRS a distribution he received from his employee stock ownership plan (ESOP), and so a six-year statute of limitations applied with regard to a deficiency notice sent more than three years, but less than six years, after the taxpayer filed his return.   I have several clients who have ESOPs, which is sometimes used as a tax saving tool for people who have too much income.

In the recent case, the ESOP distributed its assets to its participants’ individual retirement accounts (IRAs). The ESOP did not timely file a Form 5500, Annual Return/Report of Employee Benefit Plan, for any of the relevant years, and the taxpayer did not include the distribution in income on his return for the year he received it.

When the IRS opened an ESOP investigation several years later, the ESOP then filed a Form 5500. The IRS revoked the ESOP’s qualified status, so the distribution to the taxpayer’s IRA was not a tax-free rollover. Other documents filed by partnerships related to the ESOP did not inform the IRS of the distribution, so the income was omitted.  See T.J. Heckman, TC Memo. 2014-131.

 

This just goes to show that you need to be careful when you take positions on your tax return and also that you need to really understand the rules about how long you should keep tax records.  If you have questions or concerns about the contents of this blog, you can contact the Wilson Tax Law Group.   This is what we do for a living and we are more than happy to help you.

 

How long should I keep my tax records?

Clients are always asking me how many years should they keep their tax records. This is a really great question and an important one that everyone should be aware of.   There is much confusion about the rule and it's because the rule is somewhat confusing.  The general rule about how long to keep tax records is that it depends.  No this isn't just another lawyer answer, it really does depend.  It depends on things like what type of record we are talking about.  It also depends on your personal tax situation - are you aggressive on your return or are you conservative on your tax return?  Maybe you fall somewhere in between.

Generally, one should keep their day-to-day tax records for at least 3 years.  Day-to-day tax records include things like DMV vehicle registration, annual medical expenses, annual mortgage interest payments, W-2 and 1099 statements, etc.

However, a client should keep records related to capital assets for the life of the asset. For example, if you own a home and make improvements to it, and have the house for 30 years before you sell it, you should keep records of the improvements, purchase agreement, closing agreement, for at least 33 years!  That's right, you need to keep those records for the entire time you owned the home plus at least 3 years after you disposed of it.

There are some more complicated rules that could apply if you take aggressive positions on your tax return.  For example, the IRS can audit you up to 6 years after you filed your tax return if you failed to report 25% of your gross income, which would constitute a "gross omission."   Also, if you are really aggressive the IRS could assert you committed fraud which would mean there is no time period limitation for the IRS to audit your tax return.  In which case the IRS could go back forever to audit your return.

In a recent case, the IRS applied the 6 year limitation period against an individual who failed to disclose income.   In this case, the individual did not disclose to the IRS a distribution he received from his employee stock ownership plan (ESOP), and so a six-year statute of limitations applied with regard to a deficiency notice sent more than three years, but less than six years, after the taxpayer filed his return.   I have several clients who have ESOPs, which is sometimes used as a tax saving tool for people who have too much income.

In the recent case, the ESOP distributed its assets to its participants’ individual retirement accounts (IRAs). The ESOP did not timely file a Form 5500, Annual Return/Report of Employee Benefit Plan, for any of the relevant years, and the taxpayer did not include the distribution in income on his return for the year he received it.

When the IRS opened an ESOP investigation several years later, the ESOP then filed a Form 5500. The IRS revoked the ESOP’s qualified status, so the distribution to the taxpayer’s IRA was not a tax-free rollover. Other documents filed by partnerships related to the ESOP did not inform the IRS of the distribution, so the income was omitted.  See T.J. Heckman, TC Memo. 2014-131.

 

This just goes to show that you need to be careful when you take positions on your tax return and also that you need to really understand the rules about how long you should keep tax records.  If you have questions or concerns about the contents of this blog, you can contact the Wilson Tax Law Group.   This is what we do for a living and we are more than happy to help you.

 

Hearings continue into missing IRS emails

The saga on the IRS inquiry over tea party tax exempt applications continues.   This week IRS Commissioner John Koskinen appeared before the House Ways and Means Committee on June 20 and the House Oversight Committee on June 23 to defend the agency’s handling of employee emails. 

Before the Ways and Means Committee, Koskinen rebutted accusations that former IRS official Lois Lerner destroyed her computer in 2011 to avoid prosecution for targeting conservative groups seeking nonprofit status. Koskinen told lawmakers that the hard drive on Lerner’s work computer crashed before the current Congressional investigations began and the agency’s information technology department could not repair it.

Koskinen also indicated that the IRS Tax Exempt and Government Entities Division plans to restart audits of Code Sec. 501(c)(4) organizations that were selected for examination but set aside. "I think it is unfair to them to leave them in limbo, that they deserve to have closure," Koskinen explained. "Any request for information that was inappropriate, they do not have to respond to," he said.

As a former IRS employee at the IRS Office of Chief Counsel, I am aware of the type of computer systems and technology that the IRS uses.  The IRS has to store and protect confidential information for millions of taxpayers.  This is no small task given the enormous amount of data that needs to be protected.   As a result, the IRS maintains top of the line computers and has internal IT departments dedicated to keeping their systems safe and protected.  So it does strike me as curious that with all the technological advances and millions of dollars that taxpayers spend on IRS technologies, that the IRS cannot produce the information requested by Congress related to this matter.   

Isn't the meta data available?  I understand its nearly impossible to destroy electronic data.  Something just doesn't smell right about this one.  

Hearings continue into missing IRS emails

The saga on the IRS inquiry over tea party tax exempt applications continues.   This week IRS Commissioner John Koskinen appeared before the House Ways and Means Committee on June 20 and the House Oversight Committee on June 23 to defend the agency’s handling of employee emails. 

Before the Ways and Means Committee, Koskinen rebutted accusations that former IRS official Lois Lerner destroyed her computer in 2011 to avoid prosecution for targeting conservative groups seeking nonprofit status. Koskinen told lawmakers that the hard drive on Lerner’s work computer crashed before the current Congressional investigations began and the agency’s information technology department could not repair it.

Koskinen also indicated that the IRS Tax Exempt and Government Entities Division plans to restart audits of Code Sec. 501(c)(4) organizations that were selected for examination but set aside. "I think it is unfair to them to leave them in limbo, that they deserve to have closure," Koskinen explained. "Any request for information that was inappropriate, they do not have to respond to," he said.

As a former IRS employee at the IRS Office of Chief Counsel, I am aware of the type of computer systems and technology that the IRS uses.  The IRS has to store and protect confidential information for millions of taxpayers.  This is no small task given the enormous amount of data that needs to be protected.   As a result, the IRS maintains top of the line computers and has internal IT departments dedicated to keeping their systems safe and protected.  So it does strike me as curious that with all the technological advances and millions of dollars that taxpayers spend on IRS technologies, that the IRS cannot produce the information requested by Congress related to this matter.   

Isn't the meta data available?  I understand its nearly impossible to destroy electronic data.  Something just doesn't smell right about this one.  

Newport Beach Businessman Sentenced to Over 2 Years for Sales Tax Evasion and to Pay Restitution to Board of Equalization

Life's not always a beach, even for the Beach Cruiser business "Let It Roll" owner in Newport Beach and Costa Mesa.  On June 13, 2014, the Orange County Superior Court sentenced a local businessman, Douglas Lachman, to 27 months for sales tax evasion, according to a press release issued by the California Board of Equalization.  The business was a bike sales and rental shop that focused on the beach cruiser market for tourists.  Between 2002 and 2009 there was about $7 million under-reported sales, though this resulted in  a sales tax loss of only $553,478.

The State Board of Equalization is the California tax agency responsible for the administration of the sales taxes (among other types of taxes). The case was prosecuted by the Orange County District Attorney's Office, which is a reminder, as we know all too well from our experience in California Audits of Medical Marijuana Tax Dispensaries, tax problems can come from all sides and the state (and cities) wants that tax money just as bad as the IRS.  Of course, one of the purposes of this press release from the BOE is to encourage compliance, and both state and federal levels have  voluntary disclosure programs where you can pay the taxes and civil penalties instead of going to jail as long as they haven't already received information about you.

Newport Beach Businessman Sentenced to Over 2 Years for Sales Tax Evasion and to Pay Restitution to Board of Equalization

Life's not always a beach, even for the Beach Cruiser business "Let It Roll" owner in Newport Beach and Costa Mesa.  On June 13, 2014, the Orange County Superior Court sentenced a local businessman, Douglas Lachman, to 27 months for sales tax evasion, according to a press release issued by the California Board of Equalization.  The business was a bike sales and rental shop that focused on the beach cruiser market for tourists.  Between 2002 and 2009 there was about $7 million under-reported sales, though this resulted in  a sales tax loss of only $553,478.

The State Board of Equalization is the California tax agency responsible for the administration of the sales taxes (among other types of taxes). The case was prosecuted by the Orange County District Attorney's Office, which is a reminder, as we know all too well from our experience in California Audits of Medical Marijuana Tax Dispensaries, tax problems can come from all sides and the state (and cities) wants that tax money just as bad as the IRS.  Of course, one of the purposes of this press release from the BOE is to encourage compliance, and both state and federal levels have  voluntary disclosure programs where you can pay the taxes and civil penalties instead of going to jail as long as they haven't already received information about you.

The Southern California Criminal Tax News Round-Up