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Dog ate my hard drive: No excuse in IRS audit

When homework was completed with a pen and paper, the excuse that the dog ate your homework was plausible. It could happen, although it has always been unlikely. As everyone moves to digital, the excuse becomes the dog chewed up the flash drive or maybe the external hard drive.

Recently, the director of the Internal Revenue Service, John Koskinen, appeared before Congress to explain why emails requested as part of an investigation were not available. The excuse was a computer crash. Tapes backing up the data had also been "recycled." While Congress grills Koskinen about the missing records, this leads to the question of what happens if you lose tax records and later receive an IRS audit notice.

On its website, the IRS recommends keeping records that support yearly income or deductions until the statute of limitations expires. What does that mean? This is the period you can file an amended return or become the subject of an IRS audit seeking additional tax. With the complexities of tax law, the statute of limitations is not always clear.

The general rule for saving records, however, is three years. Pay employment taxes or claim a loss from a worthless security then you will want to hold onto records for four to seven years, according to the agency. 

While you do not need to print off a paper copy of all relevant documents, you may want to back up data in multiple locations such as on a flash drive and the cloud. This can ensure that even if one location becomes corrupt of lost, you have a digital backup to use in an audit. 

Because we live in such a technological age, it's unlikely that the IRS would be sympathetic to the "the dog ate my hard drive" excuse. But accidents can happen and information can be lost. This could put you in a particularly frustrating situation when facing an audit; and without the help of a skilled lawyer, you might find yourself with a number of legal questions and few answers on how to proceed.

Source: The Economist, "A dog ate my e-mails," June 21, 2014

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