How Long Do Tax Preparers Keep Your Records?

Tax preparers assist individuals and businesses with tax compliance, including preparing and filing tax returns. They also have a responsibility for maintaining client records. Regulations dictate how long and what types of records tax preparers must retain.

Federal Record Retention Requirements

Federal guidelines establish minimum periods for how long tax preparers must keep client records. Tax preparers are expected to retain tax records for at least three years from the date the tax return was filed or its due date, whichever is later. This aligns with the Internal Revenue Service’s (IRS) audit window for most tax returns.

The IRS’s Circular 230 outlines duties for those who practice before the IRS, including retention responsibilities. While a three-year period is standard, certain situations extend this requirement. For instance, if a taxpayer underreports their gross income by more than 25%, the IRS can look back up to six years. In cases of fraudulent returns or if a return was never filed, there is no statute of limitations, meaning records may need to be kept indefinitely. Failure to adhere to these rules can result in penalties for the tax preparer, such as a $500 penalty for not retaining required documentation.

Types of Records Tax Preparers Maintain

Tax preparers maintain various documents and information to support the tax returns they prepare. These include copies of filed tax returns, supporting schedules, and forms. They also retain engagement letters, which outline the scope of services and responsibilities between the preparer and the client.

Preparers keep client-provided source documents such as W-2s, 1099s, 1098s, and K-1s, which detail income and other financial transactions. Records of expenses, including receipts and bank statements, are also maintained, especially for non-wage income or itemized deductions. Internal workpapers and calculations created during the preparation process are kept to substantiate positions taken on the return and demonstrate due diligence. While original client documents should be returned, copies are retained to defend against potential audits or inquiries.

Client Access to Records

Clients can obtain copies of their records from a tax preparer. Preparers must promptly return any records provided by the client that are necessary for the client to comply with federal tax obligations. This includes original documents like W-2s or 1099s that the client initially supplied.

Although original documents must be returned, a preparer’s internal workpapers or proprietary information, such as their own calculations or notes, are not subject to client access. If a fee dispute arises, while a preparer may be able to withhold some documents under state law, they must still return any records required to be attached to the taxpayer’s return. Clients can request records, and preparers are expected to comply within a reasonable timeframe, often within 45 days, though they may charge a reasonable fee for providing copies.

Secure Storage of Client Information

Secure storage of client information is important for tax preparers. Federal regulations, such as the Gramm-Leach-Bliley Act and IRS Publication 4557, mandate that tax preparers implement reasonable safeguards to protect client data. This includes developing and maintaining a Written Information Security Plan (WISP).

Preparers utilize various methods for secure storage, encompassing both physical and electronic measures. Physical records are kept in locked cabinets or secure facilities. Electronic data is protected through measures such as encryption for data at rest and in transit, access controls to limit who can view sensitive information, and multi-factor authentication for accessing systems. Regular backups of data to secure external sources are also important for disaster recovery. When records are no longer needed, secure disposal methods like cross-cut shredding for paper documents and data-wiping software or physical destruction for digital media are employed to prevent unauthorized access.