How Long Do Tax Preparers Have to Keep Records?

Tax preparers assist individuals and businesses with tax return preparation. This responsibility includes maintaining thorough and accurate records. Proper record keeping is a fundamental aspect of compliance with federal regulations, protecting both the preparer and their clients. Adhering to specific record retention requirements helps ensure transparency and accountability.

Categories of Records for Tax Preparers

Tax preparers must keep various records to support the tax returns they prepare. These records include copies of the tax returns, along with all forms, schedules, and supporting statements. This provides a complete record of the filed return.

Beyond the final tax return, preparers also retain supporting documents provided by clients. These can include W-2 forms, 1099s, 1098s, receipts for expenses, invoices, bank statements, and documentation for income, deductions, and credits. These source documents validate the information reported on the tax return. Work papers, detailing calculations and decisions made during preparation, are also maintained. Engagement letters and client information sheets, outlining the scope of services and client data, are also kept.

Mandatory Retention Durations

The Internal Revenue Service (IRS) sets specific timeframes for how long tax preparers must retain records. Tax preparers must keep copies of tax returns and supporting documentation for a minimum of three years. This period begins from the later of the tax return’s due date or the date it was filed. IRS Code Section 6107 mandates this retention for three years following the close of the return period. Failure to comply can result in penalties, such as a $50 penalty per instance, up to $25,000 per return period.

There are situations where the retention period extends beyond the standard three years. If a taxpayer significantly underreports income by more than 25% of their gross income, the IRS can look back six years, so preparers should retain records for that duration. In cases involving claims for a loss from worthless securities or bad debt deductions, the recommended retention period is seven years. If a tax return was not filed or was fraudulent, records should be kept indefinitely. Employment tax records must be retained for at least four years after the tax becomes due or is paid.

Secure Record Management

Managing tax records securely is as important as knowing the retention periods. Tax preparers often utilize both physical and electronic storage methods. Physical documents require secure, organized storage to prevent loss, damage, or unauthorized access. Electronic records necessitate robust digital security measures.

Data security and privacy are important when handling sensitive client information. This includes employing encryption for digital files, using secure servers, and implementing strict access controls to limit who can view or modify records. Many tax preparers use specialized document management systems that offer features like secure portals, audit trails, and compliance with regulations such as the Gramm-Leach-Bliley Act (GLBA) and FTC Safeguards Rule. Once the mandatory retention period expires, records must be disposed of properly through secure shredding for physical documents or verified deletion for electronic files, ensuring client confidentiality.