Record Retention

[Mike Mac]

How long must we legally keep copies of the returns we have prepared for our clients?

Sorry I know this question has been asked before. I tried to do a search on "record retention" and came up with some posts but no definitive answer. Also did a search of the IRS site but got way too many hits to sort through.

If you wouldn't mind pointing me to a thread or the specific regulation, I'd appreciate it.
Right now I think I keep them for too long.

Thanks much.

Mike

[Koss]

Record Retention

Believe it or not, there may not be a specific requirement established by the IRS that is applicable to preparers.

There are many relevant requirements and guidelines. State laws and federal legislation that is not part of the Internal Revenue Code may be applicable (e.g., Sarbanes-Oxley).

The IRS does have specific requirements that are applicable to returns that are e-filed. But they are pretty tame. The electronic tax return file, and copies or images of Forms W-2, only need to be kept until the end of the calendar year. Forms 8879 and 8878 have to be kept for three years. But these requirements technically do not apply to returns that are not filed electronically. And these requirements appear to allow you to dispose of everything except Forms 8879 and 8878 at the end of the year.

See the following page at the IRS website:

http://www.irs.gov/efile/article/0,,id=205435,00.html

The requirements just cited pertain to compliance with the IRS e-file program. They don't really address the broader question.

The IRS does have some general guidelines for taxpayers in Publication 552. The general principle is that you have to keep records "for as long as they may be needed for the administration of any provision of the Internal Revenue Code." In general, that means the three-year statute of limitations for examination of a return.

These requirements are for the taxpayer. They are not necessarily binding on the preparer. Nevertheless, I think almost everyone on this board will agree that a tax pro should keep all tax returns and related records for at least the applicable three-year window.

Beyond that general benchmark, I'm not sure you're going to find any firm guidelines.

Pub. 552 says that you need to keep records associated with basis until the three-year period following the sale or disposition of the asset. But here again, this requirement is applicable to preparers. In some cases, a tax return might contain information about the basis of an asset, such as the first year in which a rental property is placed in service. But that's not really a record of the basis. In fact, the tax return itself may not tell you what the cost of the land was. The record of the basis is not the tax return. It's the source documents, such as the closing statement.

The tax pro may or may not take a copy of the closing statement for his records when the return for the first year of the rental property is prepared. That's a whole different question, and you'll get a million opinions on that issue, too. What records are you expected to keep?

Assuming that the tax pro does keep a copy of the closing statement, it simply does not follow that the tax pro is expected to keep those kinds of records until the asset is sold. It might be sold ten years later, and you may have had no contact with the client during the intervening years. And in any event, those kinds of records are not part of the tax return.

My take on this is--

If you've got aging paper files, with no corresponding electronic record (maybe you no longer have the software, or something like that), you're probably okay if you safely destroy them after five years or so. Just don't use the tax year as a automatic guide, because amended or late-filed returns for an earlier year may still be within the three-year window for an audit. If you have an active relationship with the client, it might be worth keeping the records indefinitely, or imaging them, so that you can get rid of the paper.

Which brings me to my other point.

I have asserted that there may not be a firm record retention requirement for tax pros, other than the requirements of the e-file program.

But having said that...

When it comes to electronic records, whether it is the tax return file itself or supporting documents that have been scanned, such as Forms W-2, closing statements, or receipts for expenses...

I'm not sure I see a compelling reason to destroy those electronic records at all, no matter how old they may be.

In my tax practice we scan everything, and we don't keep a paper copy.

And we're a looooong way from the point where would have to start thinking about limits on data storage capacity.

An external hard drive that holds 2 terabytes is not that expensive. And I think it would be pretty tough to fill that up, unless you're a very large firm.

BMK

[Mike Mac]

Thanks for the link and for taking the time to respond Koss, I appreciate it.

I believe my shredder will be in for a heavy workout after the season closes.

Mike

[ChEAr$]

There has always been a regulation pertaining to paid preparers, saying that they must keep records for at least three years after the return has been prepared.

Records means either 1. a copy of the return, or 2. a list of clients with TIN for which a return was prepared.

Normally this means keeping records for tax year 2009 until April 15th of 2013.