How Long Do I Need To Keep My Tax Records?

I am often asked how long do I have to maintain records to protect myself against actions by the Internal Revenue Service? Along with that question comes the question about whether the IRS has the burden of proving a taxpayer owes the tax (assuming it met its burden when first assessing the tax) if many years have passed without the IRS pursing the taxpayer and the taxpayer no longer having his or her records? Shouldn’t the IRS be the one to demonstrate that the taxpayer still owes the taxes? The United States Tax Court, in the case of  Paynter v. Commissioner of Internal Revenue, T. C. Summary Opinion 2017-12, addressed these questions.

The taxpayers in Paynter were an attorney and his wife. They filed their income tax returns every year from 2004 through 2014 on or before the extended due date of October 15. The taxpayer never made estimated tax payments because, as he told the Court, he did not like and did not believe in the estimated tax payment system. They paid their taxes when they received a bill from the Internal Revenue Service. That bill would generally show up months after they filed their return.

The issue in this case was whether the taxpayers paid their taxes for the year 2006. The taxpayers claimed they received the notice for the tax obligation at the end of 2007 or early in 2008, and then paid the taxes at the local office of the Internal Revenue Service. While the Internal Revenue Service showed the returns were filed and tax payments were made for 2004, 2005 and 2008 through 2014, they did not show a payment for the year 2006.

This case was made more difficult by the following facts: the Internal Revenue Service sent the taxpayers a notice in late 2007, but never sent another notice until August 27, 2014, almost 7 years after the first and only prior notice; in 2013, the taxpayers destroyed all of their records relating to 2006; and, the bank that the taxpayers used had been seized by the FDIC and subsequently closed so bank records were no longer available. Therefore, the only records available were the IRS’s records showing no payment had been made for 2006.

The taxpayers testified, and the IRS agreed, that they had a history of filing their returns on extension and in every other year paid their tax. It seemed logical to the taxpayers that the IRS could see the pattern and would accept they would kept up this pattern.

Unfortunately for the taxpayers, a recurring pattern was not enough to prove a payment. The matter was before the Tax Court after a Collection Due Process Hearing in which the Settlement Officer found against the taxpayers. The Tax Court needed to be convinced that the Settlement Officer abused his discretion in making his finding. The Tax Court was not convinced and therefore could not make a determination in favor of the taxpayers.

Could the Taxpayers Claim The IRS Should Not Be Allowed to Pursue Them Because of
the Significant Time It Had Waited?

The taxpayers also argued that the Internal Revenue Service should be equitably estopped from pursuing the tax. Equitable estoppel is a judicial doctrine that requires finding a party relied on another party’s representations and suffered a detriment because of that reliance. The taxpayers believed they relied on written advisory statements made by the Internal Revenue Service that taxpayers need only retain their documents for a limited period of time. Relying on that, they destroyed records for 2006 in 2013. They believed this was acceptable conduct in light of the IRS’s written statements.

To invoke the doctrine of equitable estoppel against the Commissioner of Internal Revenue, the taxpayer must satisfy all of the traditional elements of an equitable estoppel claim:

The Court noted that in the Ninth Circuit, before it could even get to the above elements, the taxpayer had to prove affirmative misconduct on the part of the Commissioner. This requires more than negligence. It requires an “affirmative misrepresentation or affirmative concealment of material fact such as a deliberate lie or a pattern of false promises.” Paynter at 22. The parties stipulated to a statement from the IRS providing the “length of time you should keep a document depends on the action, expense, or event which the document records.” Paynter at 9. The statement also provides, “do not discard them until you check to see if you have to keep them for longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS states.” Paynter at 9. Unfortunately for taxpayers, the court found this was not enough. The taxpayers did not present sufficient evidence to prove any affirmative misconduct by the Internal Revenue Service. The taxpayers were not entitled to equitable estoppel to prevent future levy action.

The Tax Court did not condone the Internal Revenue Service’s action. It noted that the Internal Revenue Service had waited too long between the first and second notices. However, the IRS was still within the 10 year statute of limitations on collections, so it was legal for it to send the second notice and issue a levy. Therefore,  the Settlement Officer did not abuse his discretion.

The Court made a point to say “[w]ithout a doubt this delay has created certain hardships for petitioners.” Paynter at 24. Unfortunately, the taxpayers had not asked the Court for an abatement of interest. Had they done so, it seems clear the Court would have granted their request.

In answer to the many questions I receive about how long you need to keep your records, I advise my clients that there is no hard and fast time period. As the IRS says, the “length of time you should keep a document depends on the action, expense, or event which the document records.”  “Do not discard them until you check to see if you have to keep them for longer for other purposes.”

As for the burden of proving you have paid the tax, after the IRS has met its burden to make the assessment, the burden is on the taxpayer to prove the taxes are no longer owing.