January 2003

Retention and Returning of Clients’ Tax Records

Q. My tax client has asked that I send him all records that I have in my possession relating to him, including tax returns, source documents, my work papers, etc. He owes me fees. How long must I keep tax client records? What must I return to the client?
A. Code of Conduct Rule 501 requires that you return all documents the client gave you to prepare his returns regardless of whether the fees have been paid. You are obligated under the Internal Revenue Code (IRC) Sec. 6107 to give the client a copy of a completed return at the time you present the return to the client for signing. Rule 501 states that once you have given the client a copy of any document, you are not obligated to comply with any subsequent requests for copies.

The IRS’ Circular 230, Regulations Governing Practice Before the Internal Revenue Service, basically states that practitioners must return any documents given to them by the client. However, practitioners may withhold any documents they prepared until payment of fees for the documents is received.

The Code of Conduct does not address the issue of retention periods. However, IRC Sec. 6107 (b) states “…Any person who is an income tax return preparer with respect to a return or claim for refund shall, for the period ending three years after the close of the return period (1) retain a completed copy of such return or claim, or retain, on a list, the name and taxpayer identification number of the taxpayer for whom such return or claim was prepared, and (2) make such copy or list available for inspection upon request by the Secretary.” The return period mentioned above means the 12-month period beginning on July 1 of each year (IRC Sec. 6060(c)).

Termination of Engagement Prior to Completion

Q. Does Rule 501 require a member to furnish a tax return or supporting detail to a client if the engagement to prepare the tax return is terminated prior to its completion?
A. As provided in Interpretation 501-1, if an engagement is terminated either by the member or the client prior to completion, the member is required to return or furnish copies of only those records originally given to the member by the client. Therefore, if a member has been engaged to prepare a tax return and the client or the member terminates the engagement before the tax return is delivered to the client, the member’s responsibility is to return only those records originally provided to the member by the client.

Verifying Information on a Tax Return

Q. What is my obligation to examine or verify certain supporting data or to consider information related to another taxpayer when preparing a client’s return?
A. According to the American Institute of CPAs’ Statement on Standards for Tax Services, in preparing or signing a return, a member may in good faith rely, without verification, on information furnished by the taxpayer or by third parties. However, a member should not ignore the implications of information furnished, and should make reasonable inquiries if the information furnished appears to be incorrect, incomplete or inconsistent either on its face or on the basis of other facts known to the member. Further, a member should refer to the taxpayer’s returns for prior years whenever feasible.

If the tax law or regulations impose a condition with respect to deductibility or other tax treatment of an item, such as taxpayer maintenance of books and records or substantiating documentation to support the reported deduction of tax treatment, a member should make appropriate inquiries to determine to the member’s satisfaction whether such condition has been met.

When preparing a tax return, a member should consider information actually known to that member from the tax return of another taxpayer if the information is relevant to that tax return and its consideration is necessary to properly prepare that tax return. In using such information, a member should consider any limitations imposed by any law or rule relating to confidentiality.

IRS Circular 230 states that a practitioner may rely in good faith, without verification, on the information provided by a client. However, the practitioner must make reasonable inquiries if the information appears to be incorrect, inconsistent or incomplete.

Computer Processing of Clients’ Returns

Q. May a member make use of an outside service bureau for the processing of clients’ tax returns? The member’s firm would control the input of information and the computer service would perform the mathematical computations and print the return. Is there any violation of the confidential relationship in the fact that client information leaves the member’s office?
A. A member may utilize outside services to process tax returns. He must take all necessary precautions to be sure that the use of outside services does not result in the release of confidential information.

Information to Successor CPA About Tax Return Irregularities

Q. A member withdrew from an engagement on discovering irregularities in his client’s tax return. May he reveal to the successor accountant why the relationship was terminated?
A. Rule 301 on confidentiality is not intended to help an unscrupulous client cover up illegal acts or otherwise hide information by changing CPAs. If the member is contacted by the successor, he should, at a minimum, suggest that the successor ask the client to permit the member to discuss all matters freely with the successor. The successor is then on notice of some conflict. Because of the serious legal implications, the member should seek legal advice as to his status and obligations in the matter.

Errors on a Prior Return

Q. What is my responsibility when I discover an error on a client’s prior return?
A. According to the AICPA’s Statement on Standards for Tax Services, a member should inform the taxpayer promptly upon becoming aware of an error in a previously filed return or upon becoming aware of a taxpayer’s failure to file a required return. A member should recommend the corrective measures to be taken. Such recommendation may be given orally. The member is not obligated to inform the taxing authority, and a member may not do so without the taxpayer’s permission, except when required by law.

If a member is requested to prepare the current year’s return and the taxpayer has not taken appropriate action to correct an error in a prior year’s return, the member should consider whether to withdraw from preparing the return and whether to continue a professional or employment relationship with the taxpayer. If the member does prepare such current year’s return, the member should take reasonable steps to ensure that the error is not repeated.

The IRS’ Circular 230 has been revised to require tax practitioners to notify the taxpayer of the consequences under the Code of noncompliance, errors or omissions.

Regulations and Guidelines

Q. Where can I find regulations and guidelines for tax preparers?
A. The AICPA’s Statement on Standards for Tax Practice can be purchased directly from the AICPA. The IRS’ Circular 230, Regulations Governing Practice Before the Internal Revenue Service, can be found on its website at
www.irs.gov/pub/irs-pdf/pcir230.pdf.