After someone files taxes, in most cases, the IRS has three years from the date when the return was filed to conduct an audit and assess additional taxes. This three year time-frame is known as the assessment statute of limitations. However, most audits are performed within months after a return has been filed. Keep in mind, in some situations, the IRS has the authority to go back as far as six years or more. Sometimes, by the time IRS agents get around to auditing a return, the person who filed the return may already be deceased. Generally, it is a good idea to keep a deceased loved one's or business partner's tax records for seven years.
Can a Deceased Person Be Audited?
In short, yes, a deceased person can be audited. If you are a relative, friend or spouse, and you have inherited or control the decedent's estate, then you will need to provide documentation to protect those assets. You will not be directly responsible for paying any back taxes or penalties and fees, however, any that are owed must come from the estate or money inherited from the decedent.
If you are the spouse of the person in question, you may be obligated to pay the back taxes yourself if funds or assets for the year in question were deemed community property. But any money or asset received as a widow or widower is not subject to IRS tax liens or garnishment.
What Documentation Should I Keep?
Keep proof of tax records and supporting documents such as W-2s, proof of income, bank or stock brokerage statements, receipts and medical bills, as well as charitable or retirement contributions. This documentation will be immensely helpful in the case of an IRS audit. Basically, everything you would keep for your own personal tax records should be kept for the deceased person. Keep these records for at least seven years before properly shredding and disposing of them.
The easiest way to keep track of all the records is to organize them by year. Put the supporting documentation into folders, and label each folder with its contents. If the situation arises where the IRS needs to perform an audit or suspects fraud and tax evasion, you will have all the proof you need right at your disposal, so you can respond in a timely manner. Seeking the advice of a qualified estate planner or tax advisor can prove invaluable during this process.