Client record retention and tax workpapers.

• Author: Holub, Steven F.

Recent changes to the AICPA Code of Professional Ethics, involving ET Section 501,"Acts Discreditable" of AICPA Professional Standards, and, in particular, Interpretation 501-1, Retention of Client Records (effective April 30, 2000), might appear simple: any attempt to retain client records after a demand is made for them is an "act discreditable to the profession" in violation of Rule 501. However, on further reading, the interpretation is not clear at all.

Confusion exists in two areas addressed in the interpretation: (1) identifying which records are client records (as opposed to tax workpapers) and (2) determining whether practitioners can require payment of fees due on engagements, before providing clients with such records.

Workpapers or Client Records?

In determining when tax workpapers become client records, paragraph 4 of AICPA Interpretation 501-1 states, "in some instances a member's workpapers contain information that is not reflected in the client's books and records, with the result that the client's financial information is incomplete." The original interpretation includes examples such as (1) adjusting, closing, combining or consolidating journal entries and (2) information normally contained in books of original entry and general ledger or subsidiary ledgers.

Item (2) creates the ambiguity. Most practitioners agree that depreciation schedules, prepaid schedules (e.g., insurance, taxes, etc.) and loan amortization schedules are client records. However, the revised rule adds a new Item (3),"Tax and Depreciation Carryforward Information," to paragraph 4 that raises the question about whether some other schedules (such as prepaid assets and loans) are client records, as these are not specifically mentioned in the new rule. The fact that tax and depreciation carryforward schedules were specifically mentioned does not necessarily exclude other tax workpapers from being information normally contained in books of original entry. However, it would seem that, with the addition of Item (3), there is no doubt that Rule 501 covers some tax workpapers. Therefore, practitioners should examine what normally constitutes a set of tax workpapers, regardless of whether financial statements are also prepared.

The new section clearly covers all carryforward schedules, including net operating losses (regular and alternative minimum tax), capital losses, contributions, passive activity losses and others. But does it also cover M-1 adjustments...