keep prior year returns?

Hello,

How long must we tax pros keep copies of prior year returns?

Thanks,
Debbie

3 years.

Great name! LOL

You should create and implement a document retention policy if you don't have one already.

I think the AICPA (or was it AON insurance) offers a template, but I don't think that will help OP out as she isn't a member of the AICPA.

I keep client tax returns and workpapers for 7 years.

On a slight tangent, and I don't want to derail the thread, but I have been thinking recently about modifying my retention policy to: keeping tax returns indefinitely and purging workpapers (e.g. the specific Caseware file) after 7 years. Thoughts on that? Good idea? Bad idea?

The "Pinkston" case traced "basis" to the original transaction, and adjusted (increased) the tax assessment
calculation for all years - far beyond the usual 3 or 6-year periods. Some records are "permanent" and should be
maintained forever. For example, basis in an S-Corp, Partner's Capital Accounts, basis in assets.

basis in an S-Corp, Partner's Capital Accounts

Agree, I just handle that with a carryfoward file and add to it every year.

basis in assets.

So, for example, do you carryforward settlement statements for real estate and related workpapers, PBC source documents related to improvements, etc indefinitely until that particular real estate is disposed of by the client?

We keep a Permanent file for those sorts of things.

We keep a Permanent file for those sorts of things.

Agree - need proof of basis contributions and purchase of assets. Numbers alone,
on a depreciation schedule or fixed assets schedule are not sufficient proof, must
produce supporting evidence.

On a slight tangent, and I don't want to derail the thread, but I have been thinking recently about modifying my retention policy to: keeping tax returns indefinitely and purging workpapers (e.g. the specific Caseware file) after 7 years. Thoughts on that? Good idea? Bad idea?

That's fine. Just don't tell the client your new policy is to keep indefinitely.

Regarding purging workpapers - Is this on paper or has it already been scanned? If scanned, might as well keep that indefinitely, too. This will prevent the need for having to pull out certain "permanent" documents. The 2020 purchase escrow for the rental will be scanned with the 2020 workpapers.

I'm in no hurry to purge scanned documents and returns but I will not advertise that. If clients want copies of older stuff, there will be a charge. Former clients will pay more.

I would also recommend checking your local licensing jurisdiction. They may address record retention by statute.

Also check with your professional liability insurance carrier.

"Must" we keep? There is no requirement for e-filed returns, right? Just the 8879 for 3 years?

"Should" we keep. Forever IMO.

I had a client carrying over capital losses from 2001 who was recently audited for a property sale and the state required substantiation of the losses.

Also, if the IRS suspects fraud or other issues there is no SOL.

Data storage is cheap.

PS: It's in my engagement letter that we do not guarantee the storage of tax docs (in case the cloud evaporates or something).

Yes - keep info regarding capital losses. Had an IRS audit in 2016 with carryover capital losses. Had to go back to 2002 when it "started". Seems easier to keep "forever" rather than take time to cull the differences.

This has been helpful for me. Hopefully for others too.

Are you worried about your liability exposure? Perhaps being asked for other "non-perm" workpapers or files by the IRS, a court, or others if you're keeping everything indefinitely?

I always thought a document retention policy of 3 or 6/7 years, after which the non-perm items were purged, was a best practice, but now I'm kind of rethinking it.

The burden is on the taxpayer to keep required documents. Why do you want to become the repository? I inform all my clients the need to keep original books and records as necessary and according to law.