Question of Long Term Capital Losses and Gains

If they didn't ask for documentation when you first reported the losses, I suspect they're unlikely to do so now. As long as the loss you carry foreward to this year's return matches the excess loss from last year, everything should be in order.

Let's assume, for argument, that your loss was $150,000 and you have claimed $3,000 per year. Its' very unlikely that the IRS would select a return for audit merely because of a net $3,000 capital loss for audit.

Let's further assume that this year, now five years later, you have large capital gains, and can use the remaining $135,000 in losses. There is no reason why the IRS can't examine this loss and it is much more likely that they would, than in a prior year. Their not auditing the prior year returns does not establish that the loss is deductible, only that they can't assert a deficiency in those prior years that are barred by statute.

I've seen them do just that.

Solution: Claim whatever losses are allowable and retain all the documentation that you have to insure they would successfully be sustained on an audit.

He said it was "many years ago", which sounds like more than the 5 you assumed. Isn't there a 7-year statute of limitations on how far they can go back for tax fraud, so he should be safe now?

He didn't say anything about tax fraud but if he did, they can go back forever. There is no statute on a fraudulent return. That provision is in Sec. 6501(c)(1) of the statute. The seven year statute that you're referring to is likely the special statute when there is an omission of 25% of his gross income. It's in Sec. 6501(e). It can't apply to this post because it only applies to omitted income, and the post asks about deductions.

Back to his question, if he's asking about his 2014 return, if the loss was incurred in 2007, and all returns were filed by the original due date, then the IRS cannot assert a deficiency for 2007 - 2011 because those years are barred. They can assert a deficiency for 2012 - 2014, but only the tax on the amount of loss claimed in those years, including the amount offset by the capital gain.

I took some large losses in 2009 and deducted $3K/yr from 2009 to 2012. In 2013 I took a large gain that ate up all the remaining losses and generated a taxable capital gain. I got no questions from the IRS.