Documentation and recordkeeping for tax practitioners.

• Author: Jones, Karen L.

During the course of their work, tax practitioners accumulate volumes of paper documents and electronic files (hereinafter collectively referred to as records). This often leads to questions such as:

* What records are required to be retained?

* In addition to records that must be retained, what other records are prudent to be retained?

* How long should the records be retained?

* How can records be protected securely?

* How should requests for the retained records be addressed?

A tax practitioner's records can be loosely categorized into two groups:

* Firm business records; and

* Work product and documentation records.

This column focuses on discussing these questions relative to work product and documentation records.

Recordkeeping requirements

There is no single comprehensive list of the records a tax practitioner must retain in the Internal Revenue Code or other authoritative source that is easily referenced. Rather, the requirements are contained throughout the Code and the Treasury regulations, based on topic. When considering recordkeeping requirements, tax practitioners should focus on the tax returns or claims for refunds for which they are a tax preparer as defined in Sec. 7701(a)(36).

A common assumption is that tax preparers are required to retain a copy of every tax return they prepare. However, Sec. 6107(b) requires that the tax preparer retain a completed copy of any return or claim for refund or maintain a list with the names and taxpayer identification numbers of the taxpayers for whom the returns or claims were prepared.

While keeping an actual copy of the tax return or claim for refund prepared might not be required, it may be prudent to do so, as discussed in a following section of this column. The return copies or the list must be maintained for three years after the close of the return period (as defined in Sec. 6060(c)). Unfortunately, the term "return period" as defined for this section is most likely not the period that most practitioners would anticipate. Rather, it is the 12-month period beginning on July 1 of each year and is unrelated to the tax return period or the tax return deadline.

For example, a tax preparer prepares and delivers an individual 2022 return in August 2023. The "return period" per the Sec. 6060(c) definition ends on June 30, 2024, so a copy of the return (or the list) would need to be maintained until June 30, 2027. A tax practitioner who fails to retain a copy or list as required by Sec. 6107(b) may be assessed a penalty of $50 for each failure, with a maximum penalty for any return period of $25,000 (Sec. 6695(d)).

Several other Code sections and/or Treasury regulations require specific record retention. For instance, if a tax preparer prepares a return that includes the head-of-household filing status, the earned income tax credit (EITC), the child tax credit, the additional child tax credit, the credit for other dependents, or the American opportunity tax credit, Form 8867, Paid Preparer's Due Diligence Checklist, is required.

Specific record-retention requirements encompassing the five types of records to be maintained and the length of time those records must be kept (generally, three years) are detailed in Regs. Sec. 1.6695-2(b)(4)(ii). Additional explanatory information, interview tips, and best practices are available in IRS Publication 4687, Paid Preparer Due Diligence, and the Tax Preparer Toolkit on EITC Central. It is...