Record retention policies: how long is long enough?

• Author: Chambers, Valrie

Tax professionals are frequently asked by their clients for guidance on document and record retention policies. A good record retention policy should meet various legal requirements as well as those of federal, state, and local taxing authorities. At the same time, however, the policies should strive for a cost-effective way of doing so. In advising clients on retention policies, the concern is often with keeping records too long, and because of the cost and logistical issues related to record retention, many taxpayers want to destroy outdated records as soon as possible. However, holding onto records can be beneficial, as illustrated in Byk (T.C. Summ. 2010-137 (2010)).

For more than 30 years, Donald J. Byk operated a dental practice. In 2007, he received a notice from the IRS asserting that he had not filed Form 941, Employer's Quarterly Federal Tax Rerurn, for the tax period ended June 30, 2000, almost seven years earlier. Upon receipt of the notice, the taxpayer contacted his accountant, who furnished a copy of the return in question. This retained copy was given to the IRS as evidence of earlier filing, but no remittance was included with the copy when it was submitted to the IRS in 2007.

The IRS treated the 2007 submission as an original return and on October 7, 2008, issued a Notice of Federal Tax Lien (NFTL) to Byk. The notice stated that the taxpayer had not fully paid the employment taxes related to the June 2000 Form 941. The taxpayer requested and was granted a collection due process (CDP) hearing. During the hearing, Byk asserted that the employment taxes in question had in fact been paid in 2000 when the original return was filed.

Approximately two months after the CDP hearing, the IRS issued a Notice of Determination Concerning Collection Action, which stated that the tax liability was valid and had not been paid.

In ruling in favor of the taxpayer, the Tax Court noted the following key facts:

* The IRS did not adequately show that it made an attempt to verify whether the return in question was timely filed and related taxes timely paid in 2000. The court noted that in conducting a CDP hearing, the Appeals officer must verify that the IRS timely assessed the liability, the taxpayer failed to pay the liability, the taxpayer was given a notice and demand for payment, and the taxpayer was given an NFTL filing. If these requirements are not met, the collection cannot proceed. The IRS did not provide Form 3050, Certification of...