How Long Should You Keep Your Records

HOW LONG SHOULD YOU KEEP YOUR RECORDS?

The Answer is Disturbing

How long should you keep your tax records? I’ve been asked this a million times, and my standard answer is relatively simple. The general rule is that Code section 6501(a) gives the IRS just three years from the date a return is filed in which to audit that return. Under certain circumstances, the time may grow to six years. Beyond that, there is very little authority to challenge a filed tax return.

One reason the IRS may go back beyond six years is in the case of fraud, which is highly unusual. Moreover, the burden of proof in fraud cases, civil or criminal, is on the IRS.

So my rule of thumb is to keep your records for six years from the date the return is filed, or seven calendar years from the year for which the return applies.

A recent decision of the Third Circuit Court of Appeals turned that conventional wisdom on its head. Under the decision in Murrin v. Commissioner, 158 F.4th 527 (3rd Cir. 2025), millions of taxpayers who hire somebody to prepare their returns may find that there is a very different answer to the record-retention question. The answer might now be, forever.

A Tax Bill More Than Twenty Years Later

The facts in Murrin illustrate just how serious the problem may be. Stephanie Murrin hired a return preparer named Duane Howell to prepare her income tax returns for 1993 through 1999. Howell put false or fraudulent entries on the returns with the intent to evade tax. But here is the critical twist. Murrin herself did not commit the fraud. She did not cause the fraudulent entries made in the return, and she did not intend to evade tax.

Nevertheless, in 2019 — more than twenty years after some of the returns were filed — the IRS issued Murrin a Notice of Deficiency. The IRS claimed that she underpaid $65,318 in tax.

How can the IRS assess a tax more than twenty years after a return was filed?

Consider section 6501(c)(1). That provision creates the exception to the normal three-year statute of limitations which I alluded to above. It provides that, in the case of a “false or fraudulent return with the intent to evade tax,” the IRS may assess the tax “at any time.” There is no civil statute of limitations on the IRS’s right to assess.

The question in Murrin was therefore quite simple: Whose fraudulent intent counts?

Murrin argued that the unlimited assessment period applies when the taxpayer intended to evade tax. Since she had no such intent, she argued that the normal three-year statute barred the assessment. The Third Circuit disagreed.

The court ruled that section 6501(c)(1) does not say who must possess the intent to evade tax. According to the court, it makes no difference whether the fraudulent intent belongs to the taxpayer, accountant, lawyer or tax preparer. That means the misconduct of your tax preparer can potentially keep your tax return open forever.

Think about that. You hire somebody to prepare your return. You provide accurate information. You answer the preparer’s questions truthfully. You sign and file the return believing everything is correct. Unknown to you, the preparer deliberately inserted fraudulent information which is entirely possible because preparers generally carry a duty to E-file the returns they prepare. You might not have even seen the return that was actually filed. Preparers do this to increase your refund, of which they get a percentage (a problem the IRS has known about for decades). Twenty years later, the IRS comes knocking.

Under Murrin, the three-year statute of limitations does not protect you.

 Introducing the “Forever” Rule

A taxpayer who uses a preparer cannot necessarily know whether the three-year limitations period expired because he cannot necessarily know whether the preparer did something fraudulent.

Suppose you discard your records after seven years, as I have routinely (until now) suggested. Fifteen years later, the IRS discovers that your former tax pro operated a fraudulent return-preparation scheme. The government then examines your return. How do you prove what information you gave the preparer fifteen years earlier? Where are your receipts? Where are your bank statements? Where are the documents establishing your income, itemized deductions, exemptions, business expenses, etc.?

They may be long gone, but the IRS’s fraud theory is not. This is why we may be faced with a rule requiring taxpayers to keep their supporting records forever if they use third parties to prepare their returns.

 Not Every Court Agrees

The Third Circuit’s interpretation is not universally accepted. Ten years before Murrin, the Federal Circuit reached the opposite conclusion in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015). There, the government likewise attempted to invoke section 6501(c)(1) based upon fraudulent conduct attributable to a third party. The court rejected the government’s position.

The court acknowledged that section 6501(c)(1) does not expressly identify whose fraudulent intent matters. But after examining the structure and history of the Code, the court concluded that the unlimited limitations period applies when the taxpayer possesses the intent to evade tax. That makes considerably more sense, but as Scott noted in the previous article, that’s a bit rare in federal court decisions on tax matters.

Statutes of limitation exist for a reason. At some point disputes must end. Even the Taxpayer Bill of Rights in section 7803 of the Code provides that taxpayers have a right to finality with regard to IRS disputes. Evidence disappears. Memories fade. Witnesses die. Businesses close. Records are lost or destroyed. The government should not be permitted to resurrect a decades-old tax year against an innocent taxpayer because of misconduct committed by somebody else. Yet that is precisely what Murrin allows.

The TAS Act Proposes the Solution

The pending Taxpayer Assistance and Service Act (TAS) contains a remarkably simple solution.

Section 1003 is entitled “Limitation Period Not Extended for Victims of Preparer Fraud.” It would amend section 6501(c)(1) by inserting three simple words into the statute: “by the taxpayer.”

Thus, the unlimited assessment period would apply when the return is false or fraudulent with the intent by the taxpayer to evade all or part of the tax. That is exactly how the law should read.

The proposed amendment would apply to assessments made, or collection proceedings begun, after the date of enactment. Consequently, this is not merely a prospective solution affecting returns filed after the bill is passed. If passed in its present form, the provision would have immediate positive impact on cases involving old returns the audits of which are just beginning.

This is just one more reason to support the prompt passage of the TAS Act.

Until Congress Acts, Protect Yourself

Murrin does not literally create a new law requiring taxpayers to retain records forever. But that misses the practical problem. A record you legally were permitted to destroy may someday be the record you desperately need to defend yourself.

The tax system increasingly requires ordinary citizens to depend upon third parties. The Internal Revenue Code is so enormous and complicated that millions of Americans have little realistic choice but to hire professionals or use commercial preparation services simply to determine what they owe and how to comply.

Now the government argues, and at least one court agrees, that if the person you trusted secretly commits fraud, your statute of limitations protections disappear. That turns the purpose of a statute of limitations on its head.

Congress should enact the TAS Act in its entirety so innocent taxpayers do not lose the protection of the statute of limitations because somebody else committed fraud.

Watch Dan’s Podcast on this topic: https://youtu.be/u5ffdqKzfU0

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