How Long Must a Tax Preparer Keep Records?

Before analyzing reasons why records should or should not be retained, any tax preparer must know certain rules and regulations governing retention. These records play a crucial role in ensuring compliance with the Internal Revenue Service, providing advantages for both the preparer and clients. This post explores the duration for which a tax preparer should retain records, the types of records to keep, and the significance of maintaining them.

Understanding IRS Record Retention Requirements

The IRS has established guidelines on how many years both tax preparers and clients should retain their records. When it comes to client records, it’s crucial to keep them for a minimum of three years. The guidelines are outlined below.

Standard Duration for Keeping Records

Typically, the IRS requires that you keep your records for three years. This includes tax returns, any supporting schedules, documents, or papers that were submitted with the tax forms, as well as any other correspondence related to the preparation of the tax returns. The starting point is the day after the return’s due date or the date the return was filed, whichever comes later.

Exploring Extended Record Retention Scenarios

It’s important to note that there are instances where the retention period can extend beyond three years of existence.

Here are some examples:

Tax Return – Significant Income Underreporting: For this particular case, it is essential to maintain records for a duration of six years. For example, if the gross income reported in the return is missing and this represents over 25% of the total income, that is why it would be essential to maintain the records for a duration of six years.
Fraud or Tax Evasion: It’s important to keep records indefinitely when dealing with issues of fraud or tax evasion.
Not filed Tax Return: In cases where a tax return has not been filed, it is recommended that management keep all records as they are created or received.

Requirements That Vary by State

Tax preparers, additionally, must adhere to specific record retention regulations, which vary by state. The costs can vary significantly, so it’s important to review the laws applicable in each specific location.

Categories of Records to Keep

Understanding which records to retain is just as crucial as knowing the duration for which they should be retained.

Following are the details regarding the records that a tax preparer is required to keep:

Tax Returns and Schedules

All tax returns submitted, along with any accompanying schedules, must be kept and included in the company’s record retention policy. These documents serve as proof of the taxes completed for a client and those submitted to the appropriate authorities.

Essential Papers

This includes all the documents that can be used when putting together your tax return.

Here are some examples:

W-2s and 1099s: Documents detailing your earnings and income.
1098s: Statements for mortgage interest.
Receipts and Invoices: Any transactions involving credited funds or expenses for which receipts have been obtained.
Bank statements: Essential for demonstrating income and expenses.
Last Year’s Tax Returns: Useful for reference and comparison.

Engaging with Clients

Keeping a comprehensive record of all communications with clients, including emails, letters, and notes from teleconferences, is essential. These items play a crucial role in the decision-making process and can help address any issues that may arise during collaboration.

Work History

For those managing a team, it’s advisable for an employer to maintain individual records for each employee. This process would require tax documents including the federal and state W-2s, as well as any additional employment forms.

Importance of Record Retention

Adhering to a record retention policy goes beyond merely following established guidelines; it also plays a crucial role in ensuring the safety of both you and your clients.

Here’s why maintaining accurate records is essential:

Adhering to IRS Regulations

Failure to retain records can lead to penalties or fines. Maintaining records for a specific timeframe ensures adherence to IRS regulations, helping to sidestep any potential legal issues.

Addressing Conflicts and Evaluations

Filing a tax return can be a daunting task, and it’s important to be prepared accurately. If the tax authorities reach out regarding your return, or if you find yourself facing an audit, having the necessary records on hand can make all the difference. Retaining documentation is incredibly beneficial since it acts as evidence of the tasks completed.

Safeguarding Client Interests

Keeping records is essential for safeguarding your clients. Some of the documents that individuals maintain include those useful in the event of an audit or if there is a need to amend previously filed returns. This creates a chance to foster openness with your clients and build trust.

Professional Reputation

Maintaining accurate records is imperative in this field, and the level of detail in these records speaks volumes. It reflects a commitment to professionalism and adherence to industry standards, ultimately enhancing your reputation.

Effective Strategies for Keeping Records

Here are some effective strategies to ensure you stay compliant with the law while also safeguarding your rights:

Systematically Organize Your Records

Establish a systematic approach to managing your personal records. Organizing files becomes a breeze when you sort them into folders, label them appropriately, and store them in relevant and convenient locations.

Leverage Technology

Consider utilizing both paper and digital methods for documentation. Maintain records by utilizing digital tools and software for this purpose. Both manual and digital records offer a blend of security and convenience while ensuring that records are stored and backed up in a secure manner.

Consistently Assess Your Retention Policies

It’s important to periodically review your record retention policies to ensure they align with the latest IRS regulations and state laws. By taking this approach, you’ll guarantee compliance and have the flexibility to adjust your practices according to the situation.

Empower Your Team

The extensive use of records brings a significant risk of misuse, highlighting the importance of properly orienting your employees on record retention, including the relevant policies and procedures that must be adhered to. It’s important for everyone to fully understand and adhere to the required record retention procedures while following the established rules.

Ensure Secure Disposal of Records

It is wise to ensure security is maintained during the disposal of records and essential to safeguard client privacy by securely disposing of papers and wiping hard drives, so that their data is protected.