Tax Practice Management

Document Retention

Co-Editors:
Steven H. Holub, CPA
Aidman, Piser & Co.
Tampa, FL

Jeffrey A. Porter, CPA
Porter & Associates, CPAs
Huntington, WV

Authors:
Barbara A. Ley, CPA, CITP
Barbara A. Ley, A Professional Corporation
Oklahoma City, OK

Mark Sellner, CPA, J.D., LL.M.
Principal
Larson, Allen Weishair & Co., LLP
Minneapolis, MN

Howard Herman, CPA
Herman, Silver & Associates, CPAs, P.C.
Atlanta, GA

Valda S. Rispoli, CPA
Brownsville, TX
Washington, DC

Mr. Holub is a former chair of the AICPA Tax Division’s Tax Practice Management Committee. Mr. Porter is the chair of the AICPA Tax Division’s Tax Practice Improvement Committee. Ms. Ley, Messrs. Sellner and Herman, and Ms. Rispoli are members of that Committee’s Working Group on Document Retention. The authors give special thanks to the firm of Porter, Muirhead, Cornia & Howard.

For information about this column, contact Mr. Holub at (813) 222–8555 or stevenh@apcpa.com, or Ms. Ley at (405) 848–0255 or barbara.ley@leypc.com.

Over the last few years, the concept of document retention has been increasingly discussed and analyzed. As a result, accounting firms have become even more aware of the need to adopt a formal retention policy, to share it with all firm personnel and to inform clients of its existence. This column focuses on the retention of tax files and records. It also presents a sample retention policy and a sample schedule of retention periods; see the exhibit below. The schedule does not consider the specific requirements of individual states. Thus, accounting firms should seek the counsel necessary to ensure that they meet their local and state regulatory requirements. Further, besides their own state’s requirements, firms should also consider the requirements of the states in which their significant clients reside.

Exhibit: Sample Document Retention Policy

Information is an important asset to our firm. The document retention policy outlines procedures for retaining, storing and destroying documents. It applies uniformly to documents retained in either paper or electronic format. The procedures that pertain to the retention and destruction of e-mail documents mirror those of documents in other electronic formats as well as paper documents.

Documents to Be Retained

We retain firm business records to comply with IRS requirements. Our records support our (1) professional services, including opinions, resolution of differences, conclusions and research used in analysis, for example; (2) correspondence with clients; (3) work product; and (4) items of continuing significance. Unused documents, such as drafts, should not be retained. Documents transmitted as attachments via e-mail should be considered separately from the e-mail messages to which they are attached. Original client records are returned to clients and do not become part of our ongoing files.

Procedures for Document Storage

[Each firm should explain its procedure for document storage. It should provide guidelines that will ensure proper storage and easy retrieval of files, and will safeguard client information. All client service information must be stored in the firm’s central system.]

Documents attached to and transmitted by e-mail should be stored in machine-readable format in their appropriate client folders in our electronic document management system. E-mail messages that actually contain information pertinent to the completion of a tax return or financial statement (e.g., a client’s responses to a list of questions) should be copied in pdf or another machine-readable format and included in the source documents folder. E-mail messages not saved for filing in the correspondence file or other appropriate folder are deleted. [Each firm should also address its retention period for e-mails kept on e-mail servers.]

Retention Periods

Appendix A presents a schedule for how long we retain our accounting records and our client records. Clients should be notified in writing about our policy for destroying files and how they can request copies of any data, subject to our approval.

Retention periods commence immediately following the date of the financial statements or the tax year in the case of tax returns and workpapers.

Destruction and Control

Destruction of documents is as important as storing them. Paper documents not retained in our files should be shredded or incinerated if they contain confidential information or sensitive data. Any paper bearing a Social Security number, Federal identification number or client’s name should be destroyed in this manner, never just dropped into a trash can or bin.

We destroy our electronic documents by deleting them from the medium on which they are stored and then purging the medium according to a schedule; see Appendix A. However, for client files with potential issues that may require longer retention periods, a written list of files to be destroyed (both paper and electronic) will be reviewed by each partner. As a result, any exception to normal retention procedures must be approved in writing by the engagement and managing partners, in the document retention exception log; see Appendix B. Exceptions should be very limited and the reasons for not destroying certain documents should be clearly demonstrated.

A list of files destroyed will be maintained permanently. If we learn that a government agency is conducting an investigation into a client or that private litigation is pending or threatened (even if the firm is not directly involved), we will retain all relevant records, even if they are slated for destruction under the firm’s policy and even if no request has been made for them.

Note: The samples in the exhibit are not endorsed documents but, rather, are examples prepared by working practitioners to aid firms in implementing or refining their own retention policies.

Include All Documents in Policy

Historically, paper was the primary means of documenting work. Now, many documents such as files, workpapers, correspondence and final work products are digital. Most offices have a combination of paper and electronic documents, and both types must be included in document retention policies. Once established, policies must be adhered to in a systematic way. The procedures for keeping documents and discarding documents that no longer require retention should be carried out consistently, as should the procedures for any exceptions.

Firms need to be aware of the ease with which e-mail, voice mail and all electronic messages can become public, and the potential negative consequences of this. Even though a firm may purge e-mail regularly, the receivers of electronic messages may keep them forever. As a precaution, messages (whether written or electronic) should not contain any words or language a sender would not want to read on the front page of a newspaper or to hear repeated in court.

Comply with the IRS

An important part of an overall document retention policy is compliance with IRS requirements. All taxpayers are required to keep books and records that sufficiently establish gross income, deductions, credits or other matters required to be shown in tax returns; see Regs. Sec. 1.6001-1(a). For Federal income tax purposes, books and records must be kept for as long as they may become material in the administration of the tax laws, even though “material” is not defined. For practitioners, however, this generally means information on which they rely in preparing client returns. At a minimum, books and records must be retained until the statute of limitations (SOL) expires (including extensions) for each tax year; see Rev. Proc. 98-25, Section 5.01.

Electronic documents: The IRS has published guidance on retaining computer-generated documents and storing documents electronically. The guidance applies both to businesses and individuals. It specifies the basic, essential retention and documentation requirements for books and records maintained on computer systems; see Rev. Proc. 98-25. It also recommends how to manage and maintain documents. The requirements pertain to all tax matters, including income, excise, employment, and estate and gift taxes, as well as employee plans and exempt organizations.

Although applicable specifically to taxpayers with assets of $10 million or more and other taxpayers who maintain computerized records not available in hard copy, the guidance generally addresses businesses. Further, at the beginning of an audit, the IRS routinely reminds businesses of their responsibility for computer document retention. Its specialists in computer auditing issue Information Document Requests. Taxpayers must maintain and make available, on request, documentation of the processes used to:

1. Create the retained books and records;
2. Modify and maintain the books and records;
3. Provide sufficient information to support and verify entries on returns and to determine the correct tax liability; and
4. Provide evidence of the authenticity and integrity of the books and records.

Taxpayers must provide, at the time of an examination, the resources that the IRS deems necessary to process computerized books and records.

Electronic document storage: The IRS has also issued guidance on maintaining books and records on electronic storage systems that either make images of hard copy or transfer computerized books and records to electronic storage media; see Rev. Proc. 97-22. In general, an electronic storage system is required to:

1. Ensure an accurate and complete transfer, indexation, storage, preservation, retrieval and reproduction of the hard copy or computerized books and records;
2. Include reasonable controls and an inspection and quality assurance program to ensure the system’s integrity, accuracy, reliability and security;
3. Reproduce legible and readable hard copies; and
4. Provide support for the taxpayer’s books and records.

Taxpayers are responsible for providing, at the time of an examination, the resources that the IRS deems necessary to process its computerized books and records.

Destruction of hard copies and deleting original computerized records are permitted after the system is tested and procedures are implemented to ensure compliance with IRS guidance. In any case, books and records must be retained, at a minimum, until the SOL expires (including extensions) for each tax year.