December 2000

By Burton L. Shepard, CPA

Retention and Returning of Clients’ Tax Records

My former 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. How long must I keep tax client records? What must I return to the client?

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. Any schedules, analyses, etc. prepared by the member to support the tax return should be given to the client if the fees have been paid. You are obligated under Internal Revenue Code (IRC) section 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 Code of Conduct does not address the issue of retention periods. However, IRC section 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.”

Termination of Engagement Prior to Completion

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?

As provided in Interpretation 501-1, if an engagement is terminated by either 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

To what extent must I verify the cost basis of stocks on my client’s tax return?

According to the AICPA’s Statement on Responsibilities in Tax Practice, in preparing or signing a return, a member may in good faith rely without verification upon information furnished by the client or by third parties. However, the 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. In this connection, the member should refer to the client’s returns for prior years whenever feasible.

Where the IRS Code or income tax regulations impose a condition 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 or tax treatment), the member should make appropriate inquiries to determine to his or her satisfaction whether such condition has been met.

The individual member who is required to sign the return should consider information actually known to that member from the tax return of another client when preparing a tax return if the information is relevant to that tax return, its consideration is necessary to properly prepare that tax return, and use of such information violates no law or rule relating to confidentiality.

Computer Processing of Clients’ Returns

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 member may utilize outside services to process tax returns; however, the member 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

A member withdrew from an engagement upon discovering irregularities in his client’s tax return. May he reveal to the successor accountant why the relationship was terminated?

Rule 301 on confidentiality is not intended to help an unscrupulous client cover up illegal acts or otherwise hide information by changing CPAs. If contacted by the successor, the member 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 or her status and obligations in the matter.