Even if your client keeps a copy of his tax returns, you're still obligated to retain his tax records. Internal Revenue Service Bulletin 2012-11 states that tax preparers must maintain tax returns, along with supporting tax documentation, for a minimum of three years. In certain situations, you may want to keep the records even longer.
Maintaining Records
As a tax preparer, you rely on the information that your clients provide you about their financial situation. That means you aren't liable for penalties and fees if your client was untruthful about his tax situation, as long as you acted ethically. Because of this, you are responsible for retaining tax records and documentation. In the case of an audit or investigation, the IRS may subpoena these records to check for any misconduct on your part. If you fail to retain records, you could be subject to a penalty of $500.
What to Keep
Along with the client's main tax return, you must keep a copy of any documentation that your client provides you about his tax return. Be sure to retain:
- The client's main tax form
- Supporting tax schedules
- Tax workpapers
- Client-prepared tax return checklist
- Receipts, bank statements, general ledgers or other financial information furnished by the client.
The IRS allows you to keep documentation in either physical or electronic format.
Time Frame
The IRS mandates that tax preparers keep information for a minimum of three years from the date the tax return is filed. However, you may want to retain documents longer. Although the statute of limitations is three years for most tax returns, the IRS has an increased statute of limitations for special circumstances.
For example, the IRS can look back seven years if the taxpayer claimed a loss on worthless securities and six years if the taxpayer underreported more than 25 percent of his income. Although you're not obligated to keep records any longer than three years, doing so can be helpful for your client if he's subject to an IRS investigation down the road.