According to the IRS,
one must keep IRS tax records indefinitely if you file a fraudulent return.
I find this very confusing because they also give guidelines that as long as you didn’t file a fraudulent return, you only need to retain tax records for 3 years. But what if I file a return that I don’t believe is fraudulent, and the IRS, after 30 years, decides it might have been fraudulent. In that case, it seems as though they’d have expected me to retain those records for 30 years.
Of course, in the age of computers, it’s easy to save tax records indefinitely. However, when it comes to small business expenses, we build up a lot of receipts. And while digital 1s and 0s are cheap to store, I’d prefer the option to strategically delete receipts after X period of time. This way, if I am ever audited, I can honestly tell the IRS, “I only have the last 3 years of digital receipts stored, because that’s what your guidelines stated”
My concern is if I keep 30 years worth of detailed receipts with my tax documents, that an audit in 30 years might mean I legally have to hand them all over, and then pay a CPA Lawyer $500 an hour to go through them with the auditor. Whereas if I just keep the seemingly mandated 3 years it will be cheaper. Also, there’s a strong chance I’ll make some small mistakes over the course of 30 years of filing taxes. And I don’t want to get assessed penalties for 30 years worth of records that they found a few thousand dollars per year of expenses as ineligible for one reason or another.
In essence, it seems like the IRS is saying everyone must keep their tax records indefinitely, in the event that we decide that you may have submitted a fraudulent return. It’s unclear if they have a definition of fraudulent or not. Or if like porn, they know it when they see it. If I create fake receipts for $500k worth of expenses that didn’t exist on $600k of income, that seems fraudulent to me. But if I accidentally double counted $2,000 worth of hotel receipts alongside $200k of legitimate receipts, is that a mistake, or is that fraud? Does fraud require intent? If so, do they need to prove intent beyond a reasonable doubt, or simply beyond a preponderance of evidence?