Being in the tax, accounting and business advisory business, we get questions on record retention on a frequent basis. One record retention guideline is often misconstrued; the retention guideline pertaining to tax returns and related documents.
A common misconception is that the Internal Revenue Service (IRS) can only audit tax returns related to the last three years. In general, this is true, however, when the IRS opens an audit pertaining to a tax return filed within the last three years, and they find a “substantial error,” the IRS can then go back to past tax returns, up to six years. A substantial error is generally defined as understated income of 25% or more. If the intent to commit fraud is discovered, the IRS can go back to tax returns for an indefinite period of time.
Tax returns and related information should be kept for an adequate amount of time to cover any potential audit period. This is true for individuals, businesses, trusts and nonprofit organizations. The IRS generally audits tax returns filed within the last two years, but can open up the audit period to the last six years. It is important to keep your tax records for at least the last six tax years. For businesses and nonprofit organizations, it is generally recommended to retain tax records permanently to support a particular transaction, aid in potential acquisitions or mergers or for other business reasons.
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