Dear Liz: With tax time coming up, I have an important question. For years I have been told that the IRS has three years to audit you and after three years, supporting documentation can be shredded. But I read from other sources (including you) that we should wait seven years. So, which is it?
Answer: Your biggest risk of audit is definitely in the first three years after your tax return is due or the date it was filed, whichever deadline is later. But the IRS has another three years to audit you if it suspects you have underreported your income by 25% or more. (There’s no limit if it suspects you deliberately committed fraud.)
The seven-year recommendation stems from how we file tax returns — our 2011 return will be filed by April 2012, for example. Adding seven years to the year on the tax return should help most law-abiding taxpayers remember how long they need to hang on to supporting documentation.
Consult with your tax pro, but you may be able to save time and space by scanning your documents and keeping electronic, rather than physical, copies. The IRS accepts digital data as long as it can’t be altered.