How long do I have to keep this crap?

It's one of my favorite questions, and one that I get every year.

How long do you have to keep your tax records? Is it really seven years?

No, not really. But there also isn't a straightforward answer, either.

In general, the IRS has three years from the later of when a return is filed or is due to assess additional tax (remember, filing the return qualifies as an assessment). See 26 USC 6501. After that, the IRS is stuck with whatever tax is shown on the return. Consequently, the IRS has the incentive to move fast to assess additional taxes, which means you should hear from them no more than 18 months after you've filed your return. In 20 years of practice, I have not seen an audit notice more than two years after a return has been filed, but plenty at the 18 month mark.

So I can toss my 2009 tax records on April 15, 2013 then? 

Not so quick. Many states have longer deadlines, usually four years, though a number have shorter deadlines which mirror the IRS. So, if all is in order, and you're not doing anything funky on your return, you can toss your stuff on April 15, 2014. Or sooner, if your state statute allows.

What do you mean by 'in general'?

Well, in certain circumstances, the statute can be extended. For example, you might agree to extend the statute as part of an audit. Amending a tax return refreshes the statute, at least as it applies to new items. The IRS might allege a gross (more than 25%) understatement of income, which extends the statute to six years, instead of three. Or the IRS might allege tax fraud, which removes any statute of limitations entirely. Been filing since 1916? The IRS can go all the way back until then. Finally, the statute is suspended for a period of time (150 days, generally) after a notice of deficiency is issued. So there are a number of exceptions which you need to consider.

And if I'm not doing anything funky or being audited or amending?

Check with your state, but you should be free to empty that box in four years, not seven.

That's a relief.

I'm sure your closet agrees.

And you thought YOUR performance review was bad...

No one - no one - likes performance reviews. Whether your firm/company does them mid-year, at the end of the year, or some other time, it's pretty much a given that it doesn't matter which side of the table you're on - giver or recipient - you're not going to be happy.

But at least it's private (for most people). Your boss (probably) doesn't stand at the head of the department and say "Bob really screwed up this year! Boy, it's amazing that Fishbottom is still a client after he handled their leveraged buyout! I haven't seen work that sloppy since I looked at my six-year-old's homework!"

So, imagine, if you will, how much fun it must have been to the attorneys for Canal Corporation (formerly Chesapeake) from Troy Gould (Clifton Cates III) and Ivens, Phillips & Barker (David Sherwood and Robert Wellen) to get out of bed on Friday and find that not only had they lost, but that the court had made the effort to shred the work done by Pricewaterhousecoopers that formed the basis of their arguments. And David Miller of PWC is probably wishing that he'd let Donald Compton handle the opinion letter instead. Why? Well, read what the court wrote (thanks to TaxProfBlog for the tip):

Mr. Miller did not have direct authority requiring this percentage. He merely made this determination based on Rev. Proc. 89-12, 1989-1 C.B. 798, which was declared obsolete by Rev. Rul. 2003-99, 2003-2 C.B. 388.8 ...

A bad start, considering Mr. Miller was an attorney for the now-defunct Jenkins & Gilchrist (who bit it as a result of Enron...) and should know better than to cite without checking if the cite's still good. But it gets worse..

Chesapeake paid PWC an $800,000 flat fee for the opinion, not based on time devoted to preparing the opinion. Mr. Miller testified that he and his team spent hours on the opinion. We find this testimony inconsistent with the opinion that was admitted into evidence. The Court questions how much time could have been devoted to the draft opinion because it is littered with typographical errors, disorganized and incomplete. Moreover, Mr. Miller failed to recognize several parts of the opinion. The Court doubts that any firm would have had such a cavalier approach if the firm was being compensated solely for time devoted to rendering the opinion.


In addition, the opinion was riddled with questionable conclusions and unreasonable assumptions. Mr. Miller based his opinion on WISCO maintaining 20 percent of the LLC debt. Mr. Miller had no case law or Code authority to support this percentage, however. He instead relied on an irrelevant revenue procedure as the basis for issuing the “should” opinion. A “should” opinion is the highest level of comfort PWC offers to a client regarding whether the position taken by the client will succeed on the merits. We find it unreasonable that anyone, let alone an attorney, would issue the highest level opinion a firm offers on such dubious legal reasoning.

Ouch. So if your performance review wasn't the best, just be glad you're not David Miller today. He probably feels embarrassed to show his face at the office. And David, if your caller ID today says "Canal Corporation," you probably want to let it go to voice mail.

One wonders: Can Canal get a refund without a receipt or just a firm credit?