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how long should you keep your tax records the IRS website has a page that claims to answer this question 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 the things that perhaps the IRS doesn't want you to know about so what are the general rules 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's 2018 in 2018 99% of the examinations the IRS commences are for tax years 2015 to 17 but many you might have heard about the rule that says you need to retain your records for at least seven years so where did that rule come from the answer is that the IRS has a few exceptions to its 3-year look-back period if you understate your income by more than 25% the IRS can go back in additional three years for a total of six years but that's sort of an interesting paradox how does the IRS know you understated your income by 25% what in 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 a credible information to say you understand your income by 25% or more through some verifiable source before the audit begins what's the most common way that happens taxpayers and their representatives get a little sloppy they don't organize their files correctly when under audit and just jump too much data on an auditors desk which includes information for years outside the standard three-year period the auditor was originally 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 is perspective but let me tell you a story that demonstrates how this advice helps the government not taxpayers before he hired us to negotiate a settlement Our client Micah got involved with one of those tax protesters groups he stopped filing his taxes but he had every one of his records for the last 20 years so the grand jury subpoenaed his records by sending a notice to the custodian of records of Mike's corporation which happened to be Mike so a Fifth Amendment claim against self-incrimination would likely not work because all of his records were perfectly capped the IRS was able to assess him for years they would have had a difficult time doing otherwise if Mike got rid of the records or they were just gone the IRS would probably be limited to assessing the years only more recently if the IRS only assessed the more recent years his balance would have been lower meaning that perhaps he would not have been charged criminally or at least at a minimum his sentence would have been greatly reduced because the time to serve is calculated on the claimed loss to the government now I'm not advising anyone to do anything fraudulent in fact our long-standing philosophy is that if your current business plan requires you to cheat on your taxes get a new business plan real estate and the IRS the IRS at least correctly advises that if you have property you should hang on to all of your records for as long as you own the property plus that typical three years thereafter yeah we encountered a case where this rule would have resulted in a $40,000 tax bill to a Cline had he followed the IRS s advice our client rod was foreclosed on in 2008 foreclosure sale paid off the first mortgage but not the home equity line so the home equity bank attempted to collect from Rod now rods been struggling so finally in 2016 the home equity bank rode off his balance sending rod a cancellation of dead tiny 1099 as this is considered income however it is possible to exempt this forgiveness of debt if we can prove the home equity line went to improvements to the house and not say a vacation to Tahiti so now we need the records related to Raj old house to prove that this income should be excluded luckily for rod he had this information and we were able to wipe out this phantom income and save him a good amount in a very efficient manner sure we could have done other things if he didn't have this information but a successful resolution was far easier because he did yet right here on IRS gov it says for a rod situation that he should have been able to get rid of those tax records a long time ago some big misses here ref bar record-keeping the report of foreign bank accounts or F bar is a US Treasury form that is administered by the IRS for decades the forum was ignored by the S IRS however this changed in 2009 when the IRS realized it could use the threat of ruinous f bar penalties up to 50% of account value to cajole people into the first offshore voluntary disclosure initiative so there that is this failure to file penalty fraf bars 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 of its plate but it's also unforgivable because the IRS is rather obstinate about finding that someone had reasonable cause in its entitled to an f bar penalty waiver it is unforgivable as the IRS is fine taking 50% of someone's assets for this f bar record-keeping oversight but it's the same exact oversight irs.gov makes it fails to mention the five year record retention requirement on the record retention webpage so why are we holding taxpayers to a higher standard of care than the IRS what about if you are audited the IRS does not mention this as this advice would probably help you not them if you 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 okay with or due to their bad advice help contributed to the new problem we had a case of a client who was audited twice in a tooth Bob who had a business in Belgium and told the auditors about that business and checking accounts in Europe both times both times he gave them all source documents yet during both examinations the auditors failed to mention to Bob of his fr obligations and his 450 471 requirements even though it was incredibly obvious to anyone with knowledge of international tax law that he had these requirements the audits closed with no changes so Bob assumed he was doing everything right but no the IRS now all hepped up on its new f bar and international focus audit him once again and attempted to assess him massive F bar in four and fifty 471 penalties we asked for the files of the audits from the IRS but surprised they didn't have them and so we asked Bob hey happened to hang on to anything from the audits sure enough he did and thanks to the records he kept the IRS agreed to vastly lower penalties the fact is that Bob saved himself six figures and penalties because he hung onto records IRS gov of the foreign assets and income trap speaking of form 54 71 which is a type of foreign informational return for us shareholders of foreign corporations well there are the litany of other foreign informational returns and they all have the same problem these other forms include form 926 form 35 24 35 20 a form 54 72 form 86 2188 58 88 65 8938 the problem is this the IRS deems you to have made a substantially incomplete informational return the IRS can open your entire return no matter how old it is to a complete and full examination so in fact the IRS is entire webpage dedicated to record retention becomes wholly obsolete if foreign informational returns are involved again if the iris deems any foreign returns substantially incomplete then there is no time limitation on additional assessments so if you file or supposed to file any of these foreign information returns you might want to ignore the IRS this is an explicit advice and rather hang on to these tax records forever so these are just our observations from the IRS is own interpretations I know we have plenty of tax pros in some pretty savvy taxpayers watching our Channel so as to those of you with some experience dealing with the IRS take a look at this IRS records webpage can you think of any other advice the IRS is giving that is completely wrong and will lead to disaster please leave those in the comments below tax reform 2.0 is heating up be sure to subscribe to our channel to get the latest tax reform updates like and share this video if you think it could help anyone this is anthony parents of parents & parent LLP IRS medic i thank you for watching