How Long Does a Tax Preparer Have to Keep Records?

Tax preparers assist individuals and businesses with their tax obligations. This role involves adhering to specific recordkeeping requirements set forth by tax authorities. Understanding these obligations helps maintain compliance, ensures the accuracy of prepared returns, and safeguards both the preparer and their clients. Proper record retention supports accountability and can be important in the event of an inquiry or audit.

Who is Considered a Tax Preparer

The Internal Revenue Service (IRS) and Treasury Regulations define a tax preparer broadly. A tax preparer is any person who prepares for compensation, or employs others to prepare for compensation, all or a substantial portion of any federal tax return or claim for refund. This includes signing preparers and nonsigning preparers, and applies regardless of professional credentials, education, nationality, or location.

This definition covers a wide range of professionals, including certified public accountants (CPAs), enrolled agents (EAs), attorneys, and non-credentialed preparers. The key determinant for classification as a tax preparer is whether the service is provided for compensation.

Specific Records to Retain

Tax preparers must maintain specific records to demonstrate due diligence and compliance. A primary requirement is to keep a completed copy of each tax return or claim for refund prepared, or maintain a list containing the taxpayer’s name and identification number. The list must also include the type of return prepared and the taxable year.

Preparers should retain supporting documentation used in the preparation process. This includes client information sheets, computations, and any forms related to client consent for disclosure or use of their information. For certain credits and deductions, such as the Earned Income Tax Credit (EITC) or Child Tax Credit (CTC), specific due diligence records are required. These records might include copies of Form 8867, Paid Preparer’s Due Diligence Checklist, and worksheets used for calculations, along with a record of how and when information was obtained. Financial documents provided by the client, such as W-2s, 1099s, bank statements, receipts, and general ledgers, should also be retained to support reported figures.

Retention Timeframes

Tax preparers generally must keep records for three years. This period begins after the close of the “return period” during which the return or claim for refund was presented for the taxpayer’s signature. The “return period” is a 12-month period beginning on July 1 of each year, which might not align with the tax return’s due date or filing date. For example, a 2022 individual return prepared in August 2023 would fall under the return period ending June 30, 2024, meaning records must be kept until June 30, 2027.

While the general rule is three years, certain circumstances may necessitate longer retention periods. If a taxpayer underreports income by more than 25% of the gross income, the IRS can assess tax for up to six years, so preparers might consider retaining records for a similar duration in such cases. For claims involving a loss from worthless securities or a bad debt deduction, a seven-year retention period is advisable. Additionally, employment tax records should be kept for at least four years after the tax becomes due or is paid, whichever is later. Failing to retain required records can result in penalties, such as $50 for each failure, with a maximum penalty of $25,000 for any return period.

Recordkeeping Methods

Tax preparers have flexibility in how they store required records, with both physical and electronic methods being acceptable. Regardless of the format, security, accessibility, and integrity of the information are important. Physical records should be stored in a secure manner, such as in locked cabinets or restricted-access areas, to prevent unauthorized access. Proper disposal methods, like shredding, also protect confidential information.

For electronic records, security measures are important. The IRS recommends routinely backing up critical files to external sources, such as encrypted external drives or secure cloud-based storage. Using strong, unique passwords, multi-factor authentication, and regularly updating software with the latest security patches are important practices. Implementing security protocols like secure file transfer protocols (SFTP) and whole disk encryption helps protect sensitive client information during transmission and storage. A written data security plan, as outlined in IRS Publication 4557, is legally required and should detail how client data is protected throughout its lifecycle, including measures for risk assessment, employee training, and incident response.