You must keep records so that you can prepare a complete and accurate income tax return. The law does not require any special form of records. However, you should keep all receipts, canceled checks, and other evidence to prove amounts you claim as deductions, exclusions, or credits. Records should be retained for as long as they are important for any income tax law.
In general, you should keep records that support an item of income or a deduction appearing on a return until the statute of limitations (the period during which the IRS can audit your return) runs out. Usually this is three years after the date a return was filed (or three years after the due date of the return, if later). However, in some cases it is wise to keep records for a longer period of time, since a six-year limitations period applies in some situations, and in others (e.g., no return was filed or a return was fraudulent) there is no time limitation on the authority of the IRS to begin an audit.
For how many years can the IRS question or audit your income tax returns? Consider the following three possibilities:
• Three years. In general, the IRS may audit your returns to assess any additional taxes within three years after the date a return is filed (or within three years after the due date of the return, if later).
EXAMPLE. Pastor W filed his 2012 tax return on April 10, 2013. The IRS ordinarily may audit Pastor W’s 2012 return only if it does so by April 15, 2016.
• Six years. The three-year period during which the IRS may audit your returns is expanded to six years if you omit from gross income an amount greater than 25 percent of the amount reported on your return.
• No limit. The IRS can audit returns without any time limitation in any of the following situations: (1) a false or fraudulent return is filed with the intent to evade tax; (2) a taxpayer engages in a willful attempt in any manner to defeat or evade tax; or (3) a taxpayer fails to file a tax return. IRC 6501(c).
KEY POINT. Whenever a taxpayer is requested by the IRS to extend the statute of limitations on an assessment of tax, the IRS must notify the taxpayer of the taxpayer’s right to refuse to extend the statute of limitations or to limit the extension to particular issues.
Section 6502(a)(1) of the tax code specifies that “where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected . . . within 10 years after the assessment of the tax.”
Adapted from the 2016 Church & Clergy Tax Guide by Richard Hammar.
Specific recordkeeping requirements with respect to the following exclusions and deductions are discussed in the 2016 Church & Clergy Tax Guide:
- Housing allowances (Chapter 6)
- Business expenses (Chapter 7)
- Charitable contributions (Chapter 8)
Records of transactions affecting the basis (cost) of some assets should be retained until after the expiration of the limitations period for the tax year in which the asset is sold.
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