Does IRS really go back 25 years

9 Replies

I understand that we are supposed to keep all tax records for as long as we hold a rental property, technically.....

What if I have a property for 10+ years and still holding it?  Should I really keep all these years of tax records? Does IRS really check all the expenses over all these years?

Thank you...

IRS typically won't go back over 6-7 years. 

But I would keep records related to a property especially on renovations and items like that. 

If it's  a worst case they can go back further though. 

@Steven Hamilton II does a ton of Audit representation work. What would you recommend/ have you seen in actual audits?

@Diane G. If you think about it, you probably only need to keep tax records for the properties. So settlement sheets, rehab, and any improvements for cost basis. Then your schedule e for your depreciation. So the irs can see proof when you sell of your net profit and the cumulative depreciation on the asset so they can calculate the 25% recapture. I keep a cost basis file for each property and then a file of every schedule e going back. I shred the rest of my returns after the required holding period. I am not an accountant, just what I do.

Originally posted by @Diane G. :

I understand that we are supposed to keep all tax records for as long as we hold a rental property, technically.....

What if I have a property for 10+ years and still holding it?  Should I really keep all these years of tax records? Does IRS really check all the expenses over all these years?

Thank you...

 I know of an investor that had a $525,000 tax lien from an unfiled tax year 6 years previous. Sounds like a lot until you learn that the IRS assumes the sale of a property is 100% profit until you file. He had sold a house but had not filed his taxes. The IRS gets a copy of the sale as a matter of course anyway. There is no hiding it.

Anyway, 6 years later, my buddy hired an enrolled agent who contacted the IRS to resolve the issue. The IRS looked at 10 years surrounding the year in question and everybody determined that the records were so poorly kept and that what little documentation that was available was indecipherable, so they couldn't determine if any year's filing was accurate. They basically gave up, simply pulled a number out of the air, about 15% of the $525,000 minus acquisition cost of $395,000, so about 15% of $130,000 then put him on a payment plan and since he made the plan payments on time, they never bothered him again. I wouldn't advise anyone take that route, but that was his experience. 

I think the things that played well into it for him were that he used an enrolled agent, they contacted the IRS and he showed good faith and made his payments on time.

Originally posted by @Diane G. :

I understand that we are supposed to keep all tax records for as long as we hold a rental property, technically.....

What if I have a property for 10+ years and still holding it?  Should I really keep all these years of tax records? Does IRS really check all the expenses over all these years?

Thank you...

 Yes, you need to keep your basis records and all record pertaining to depreciation until 4+ years after the sale of the property. You have to be able to prove how much in depreciation you took over the years. that requires the full set of records. If you 1031 a property you need to keep those original property records as those prove your basis for the replacement property. 

So yes, you do need to keep them. And yes, I've had it come up in audit. It is MUCH easier to have them on hand. 

https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records

@Steven Hamilton II

Good info and thanks for the link. What does the statement, "You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property" mean?

Originally posted by @Michael King :

@Steven Hamilton II

Good info and thanks for the link. What does the statement, "You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property" mean?

 That applies to 1031 exchanges. If you take advantage of a deferred exchange you must keep the records for the entire transaction chain. 

Originally posted by @Michael King :

@Steven Hamilton II Okay thanks Steven, I guess then you need to plan ahead and even if you believe you are going to keep the property forever, have the docs on hand in case you want to go that 1031 route.

Good info, thanks for clarifying!

 Keep them, digitize them. Two is one, one is none. Make sure you have backups of your documentation in multiple places.