Document Retention FAQs for Tax Practitioners
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Document Retention FAQs for Tax Practitioners

1 year ago · 5 min read

This series of frequently asked questions (FAQs) provide guidelines for tax practitioners to consider when preparing a written document retention policy for their firm. Additional guidance is provided to help practitioners advise their clients on taxpayer record retention.

Document retention policies for firm operations and client records

Should firms maintain a written document retention policy?

It’s important for all tax practitioners to maintain a written document retention policy. A well-crafted and followed policy promotes efficiency, could assist the firm in the defense of a claim and establishes compliance with federal and state laws that dictate retention of documents.

Firms may need to consult with their liability insurance provider and/or legal counsel about their document retention policy.

Consider downloading and customizing the AICPA Tax Section’s Document Retention Policy Template for Tax Practitioners.

What types of documents should be addressed in a document retention policy?

The following are examples of the types of documents to consider when developing a retention policy:

Firm business records

  • Accounting records

  • Employment records

  • Legal records such as contracts, policies, licenses and permits

  • Records supporting provided healthcare coverage for employees

Work product and documentation

  • Client Correspondence.

  • Client deliverables.

  • Conclusions and research utilized in analysis.

  • Drafts and other documents not utilized shouldn't be retained.

  • Original client records should be returned and not retained.

  • Opinions provided.

  • Resolution of difference.

  • Workpapers used in developing the work products.

Electronic records

  • E-mail correspondence

  • Hard drives

  • Web pages/portals

What are guidelines to consider for electronic records?

Firms should obtain the necessary counsel to confirm that all applicable federal, state, local and international regulatory requirements are met.

General guidelines are as follows:

Accounting records

  • Annual and monthly financial reports – 7 years

  • Bank statements and bank reconciliations – 7 years

  • Depreciation schedules – 7 years

  • Employee expense reports – 7 years

  • General ledger detail – 7 years

  • Payroll reports (including Forms W-2 and 1099) – 7 years

  • Property and equipment records and invoices – 7 years after the disposal

  • Records on virtual currency and other digital assets including the transaction history, access and security information for as long as these assets are owned

  • Vendor invoices – 7 years

Administrative records

  • Accident reports and claims – 7 years after the accident/settlement

  • Accounts receivable reports – 7 years

  • Client newsletters and other marketing materials – 7 years

  • Conflict of interest disclosures – 7 years after the conflict has expired

  • Continuing Professional Education (CPE) records – 7 years

  • Corporate agreements, annual reports, minutes and bylaws – Permanent

  • Insurance documents and policies – 7 years after the term

  • Leases and contracts – 7 years after the term

  • Personnel files (post-employment) – 7 years after the employment ends

  • Retirement plan/401(k) plan information – Permanent

  • Shareholder documents, agreements and contracts – Permanent

  • Tax returns – Permanent

  • Time and billing information (including invoices) – 7 years

  • Worksheets and related backup documents for firm returns – 7 years

What are general document retention guidelines for client records?

Firms should obtain the necessary counsel to confirm that all applicable federal, state, local and international regulatory requirements are met.

General guidelines are as follows:

  • Audits, reviews and compilations (financial statements and workpapers) – 7 year

  • Documentation supporting required health coverage for employees and non-subjection to Sec. 4980H assessable payments (for applicable large employers) – Permanent. There is no applicable statute of limitations on assessment because there is no tax return filed to report an employer’s liability.

  • Litigation support projects (including workpapers) – 3 years

  • Regulatory examination files – 7 years after the close of the exam

  • Reports filed with government agencies (including workpapers) – 7 years

  • Permanent files for current clients – Permanent

  • Permanent files for former clients – 7 years

  • Special projects (reports and workpapers) – 7 years

  • Tax returns and workpapers (including electronic filing authorizations and any such documentation to support virtual currency transactions) – 7 years

What are general guidelines regarding destruction and control of client records?

All clients should be notified in writing regarding the retention and destruction of documents and that they may request copies of any data contained therein subject to firm approval.

Proper destruction of documents is an important consideration. Documents containing confidential or sensitive information should be destroyed using a method that renders them unreadable (such as shredding for physical files). Any exceptions (due to special circumstances related to the files) to the approved retention and destruction policy must be documented. A record should be maintained for files that have been destroyed.

Does the AICPA Tax Section have a document retention template that a firm can customize?

Consider downloading and customizing the AICPA Tax Section’s Document Retention Policy Template for Tax Practitioners.

Document retention recommendations for clients

What does the IRS recommend taxpayers maintain for their records?

Taxpayers are required to keep books and records sufficient to establish the amount of gross income, deductions, credits or other matters required to be reported on a taxpayer’s return. For individual taxpayers, this includes items such as information statements (Forms W-2, 1099, 1098, etc.), bank statements and canceled checks for relevant tax-related items, charitable contribution documentation, investment sale/purchase records and real estate documents.

Taxpayers should also maintain a copy of returns that have been filed, including all schedules and attachments and proof of any tax payments.

How long does the IRS recommend taxpayers maintain their records?

The IRS recommends taxpayers maintain their tax returns indefinitely.

At a minimum, the books and records should be maintained until the expiration of the statute of limitations, including extensions, for each tax year. The statute of limitations is generally three years from the date a taxpayer files his or her return.

In certain situations, books and records should be kept longer. For example, if income is found to have been underreported by more than 25%, records should be maintained for six years.

For additional guidance to advise taxpayers on record retention, see How long should I keep records? on irs.gov.

What are general record retention guidelines for business taxpayers?

While a business’s recordkeeping system will be unique to its situation, below are some general guidelines regarding tax-related records.

  • Canceled checks for tax payments – Permanent

  • Correspondence from IRS/taxing authorities – Permanent

  • Depreciation schedules – Permanent

  • Documentation supporting required health coverage for employees and non-subjection to Sec. 4980H assessable payments (for applicable large employers) – Permanent. There is no applicable statute of limitations on assessment because there is no tax return filed to report an employer’s liability.

  • FUTA/FICA/SUTA/income tax withholding – 4 years

  • Income tax returns – Permanent

  • Inventory reports – Permanent

  • Payroll tax returns (includes Forms W-2) – Permanent

  • Sales tax returns – Permanent

  • Support for gross income, deductions, credits or other matters required to be reported on a tax return – At a minimum, the books and records should be maintained until the expiration of the statute of limitations, including extensions, for each tax year. It’s often advisable to keep tax return support for at least six years (see How long should I keep records? on irs.gov).

  • If the business taxpayer has carryforward items from prior year income tax returns, the internal record retention policy may need to be modified. In these situations, certain original records of transactions to support any tax benefit item or position should be retained through the conclusion of the statute period of the year in which the benefit was claimed (rather than the period where the benefit/position arose).

For additional guidance, see the AICPA’s Guide to Small Business Recordkeeping.

What guidance has the IRS issued about electronic document retention for taxpayers?

Rev. Proc. 98-25 specifies the retention and documentation requirements that the IRS considers to be essential in cases where a taxpayer’s books and records are maintained within a computerized system. Recommendations for document management and maintenance also are provided. The requirements pertain to all tax matters, including income, excise, employment and estate and gift taxes, as well as employee plans and exempt organizations.

If audited by the IRS, what information must a taxpayer make available?

In general, a taxpayer must maintain and make available to the IRS, upon request, documentation of the process that:

  • Create the retained books and records;

  • Evidence the authenticity and integrity of the taxpayer’s books and records.

  • Modify and maintain the books and records;

  • Provide sufficient information to support and verify entries made on the taxpayer’s return and to determine the correct tax liability; and

The taxpayer must provide, at the time of an examination, the resources that the IRS determines are necessary to process the taxpayer’s computer books and records. Specifically, the IRS will issue a Form 4564, Information Document Request, which will provide the detail required.

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