The limitations period is the amount of time you are allowed to amend a tax return to claim a credit or refund. It also gives the IRS or California Franchise Tax Board (FTB) time to assess additional tax.
You need to take this timeframe into account when considering how long to hold onto tax returns and tax-related documents. Generally, the IRS recommends you keep this information for three years from the date you file your tax return. But if you live in California you might want to save it for longer.
A discrepancy between the California tax statute of limitations and the federal one is the reason. The FTB receives one additional year, four years from the date filed or if early the due date, to audit your state tax return. Certain other situations can extend out the statute of limitations, which we will cover in this blog.
Longer review window
Claim a loss for a worthless security or take a bad debt deduction and you need to hold onto the record for seven years. A significant discrepancy in the income you report could extend the look-back period to six years.
When you fail to file a tax return, the IRS and FTB have an unlimited amount of time. This is one reason why catching up on unfiled tax returns must be done carefully.
Filing a false or fraudulent return also gives both agencies unlimited time.
Now for the interesting California wrinkle. Assume the IRS audits you and issues a Notice of Deficiency. If you lose your case against the IRS or agree and pay the assessed tax, you need to notify the California FTB within six months.This also applies with amended returns.
Fail to notify the FTB and the California statute of limitation will never run. If it takes 10 years for the state to discover the discrepancy, it can still assess back state taxes along with interest.
If you are under an IRS audit, you should also ensure that you deal with the state FTB at the same time. An experienced tax attorney can of course provide more individualized guidance and help you with a resolve all of your tax problems at the same time.