How long should you keep tax records? IRS.gov has some great traps to fall into

How long should you keep tax records? IRS.gov has some great traps to fall into

How long should you keep your tax records? The IRS website has a page that claims to answer this question: https://ift.tt/29AWo1g But how accurate is this information? Are there things the IRS forgets to mention? Is there advice the IRS gives that could lead to disaster? Watch this video to the end to find out things that perhaps the IRS doesn’t want you to know. For most people they can get rid of their tax records after three years. Why? In most cases, the IRS is really only allowed to audit the last three years. For instance, right now it is 2018. In 2018, 99% of the examinations the IRS commences are for tax years 2015-2017. But many of you might have heard about the rule that says you need to retain your records for 7 years. So where did that number come from? the answer is that the IRS has a few exceptions to its three-year look-back period. If you understate your income by more than 25%, the IRS can go back an additional 3 years for a total of 6 years. But that’s sort of an interesting paradox. How does the IRS know you understated your income by 25%? Wouldn’t an auditor have to conduct an examination to know that you did that? And this is why we see so few audits that get opened for six years. The IRS needs to have some credible information you understated your income by 25% through some verifiable source before that audit begins. What’s the most common way this happens? Taxpayers and their representatives don’t organize their files correctly when under audit and just dump too much data on an auditors desk which includes information on years outside the 3-year period the auditor was examining. The Fraud exception Another exception is if you file a fraudulent return, the IRS can examine and assess indefinitely. So the IRS advises you to keep your tax records indefinitely if you file a fraudulent return. Which I suppose makes sense from the IRS’s perspective. But let me tell you a story that demonstrates how this advice helps the government, not taxpayers. Real Estate and property The IRS correctly advises that if you have property you should hang on to all your records for as long as you own the property plus the typical three years thereafter. Yet, we encountered a case where this rule would have resulted in a $40,000 tax bill to a client had he followed the IRS’s advice. Some big misses - FBAR recordkeeping The Report of Foreign Bank Accounts, or FBAR, is a US Treasury form that is administered by the IRS. For decades the form was ignored by the IRS. This however was changed in 2009, when the IRS realized it could use the threat of ruinous FBAR penalties — up to 50% of account value — to cajole people into the first Offshore Voluntary Disclosure Initiative. So there is a failure to file penalty for FBARs, yet there is also a penalty for failing to keep records. You must keep records on all foreign bank accounts for 5 years. The fact that this information is missing on irs.gov is understandable — the IRS has a lot on its plate. But it is also unforgivable. Because the IRS is rather obstinate about finding that someone had reasonable cause and is entitled to an FBAR penalty waiver. It is unforgivable as the IRS is fine taking 50% of someones assets for this FBAR record-keeping oversight. But it is the same exact oversight that IRS.gov makes. It fails to mention the 5 year record retention requirement on this record retention web page. So why are we holding taxpayers to a higher standard of care than the IRS? What about if you were audited? The IRS does not mention this, as this advice would probably help you, not them. If you are ever audited, you might want to hang on to those audit records forever. Why? Because you may be audited later and you may be raising a claim that the IRS was previously OK with or due to their bad advice helped contribute to. The foreign assets and income trap Speaking of Form 5471, which is a type of foreign informational return for US shareholders of a foreign corporation to file. Well there are a litany of other foreign informational returns. And they all have the same problem. These other forms include: Forms 926 Form 3520 Form 3520-A, Form 5472 Form 8621 Form 8858 Form 8865 Form 8938 The problem is this. If the IRS deems you to have filed a substantially incomplete foreign informational return, the IRS can open your entire tax return, no matter how old it is to a complete and full examination. So in fact, the IRS’s entire web page dedicated to record retention become wholly obsolete if foreign informational returns are involved. Parent & Parent LLP 144 South Main Street Wallingford, CT 06492 (203) 269-6699 info@irsmedic.com https://ift.tt/1RfwK1f https://youtu.be/M6NOA67V06Q IRS Medic