Paper file retention

I know most people here are paperless or mostly paperless. I am working my way there and don't plan on printing any returns for my records this year. Hopefully in the summer I can get my kids to scan 2020 and maybe 2019 returns.

But how long should I keep the paper files? I was keeping several years in the file cabinets and the rest in storage boxes. Once the boxes were 7+ years I would shred. But I'm thinking I don't need to keep them that long. I can go back 10+ years in my software if I needed to print a return.

Any suggestions as I try to deal with this paper monstrosity?

I started storing docs as pdfs back in 2002. I scanned everything that still remained in paper format from years back with my former firm. I keep everything and have backups on hard drives in the safe deposit box. Sometimes that old information is super valuable and clients appreciate that I have maintained it. Documenting payments received on an installment note over the last 25 years, and now in the last year the payor says that my client is owed $20k less. Gift tax returns that show that parents made a gift of stock to their child, and not the child and the soon-to-be-ex-wife. Workpapers that show the allocation of loss in a partnership when the partnership had different types of ownership interests and different allocations to those interests, and now someone says that the calculation done 15 years ago wasn't done right. That person is not going to go away just because I say that I deleted the file. Much better to have the info and get the issue resolved. I don't want to ever say to a client "Oh, I deleted your files, so I don't have that information."

We had to make this decision many years ago with our old files in our storage unit.

Generally speaking, you don’t need any of that paperwork. But there are exceptions.

For example
Gift tax returns
Estate tax returns
Other “permanent” files

Me and my partner spent an entire day touching each file. We pulled out ones that met these exceptions or had something else special about them. Reading the client name will trigger that. These got scanned. The rest, which were 95% of the total, got shredded.

Since then, no more than a handful of issues have come up where it would have been good to have scanned something that we shredded. But life went on, the client survived, another solution was figured out.

It’s not our job to store client information.

I am paperless and I keep for 7 years. Some important "permanent documents" are retained until I no longer work with the client or 7 years after last bit of work completed. I do not rely on tax software for data retention since I have had data become corrupted. Even with backups--cloud and local on rotating basis--it is simpler to keep PDFs for reference unless I need to see more detail within the tax software.

I do retain all documents used for tax prep, and I do occasionally refer back to them. Clients would find it annoying if I did not, but I am now scaling back to ONLY the documents that needed to be reported on a tax return. If it is informational only and not reportable, I am not going to keep it.

So, my overall suggestion is go through your documents. Identify what you need to retain by law, what you should retain for your benefit and good client relations, and then scan only those documents.

I was looking to buy a CPA firm that has been maintaining mostly paper records. They claimed to have a 7 year retention policy but when I was in their file room, they had boxes dating back to the mid-2000s. I knew that if the sale went through, I was going to have to hire dedicated staff just to convert all of that crap to electronic format. Glad it fell through, actually, because that would have been a horrible task!

My former employer had paper records going back to the mid 50's - haven't worked there since 2004 but know someone who helped out there for a brief time a few years ago, and she told me that nothing has changed. Paper files everywhere, no paperless storage, etc. This is a firm where the two partners are now in their late 60's and think they're staying around as long as their big business clients are around - once those clients get sold then the firm will probably dissolve.

So, my overall suggestion is go through your documents. Identify what you need to retain by law, what you should retain for your benefit and good client relations, and then scan only those documents.

For law purposes, that would be nothing except the e-file signature forms for the last 3 years. For those, just keep the paper and shred on the 4th year anniversary.

For your benefit, would be nothing except for gift tax returns, estate tax returns & permanent info.

For good client relations, would be everything else, because we mistakenly think it is our job to store their information.

My E&O recommends 6 years for returns and workpapers. Destroy after that unless it's a carryforward item.

Mine recommends 7 years.

My E&O also says 7.

If a client comes to me with an agency notice or audit, I want to be certain I have supporting documentation for the returns I prepared. I also often refer back to it for various reasons throughout the years. But, at the 7 year mark, I delete the files. I do not retain basis information, for example, except as I calculate to verify against tax--that is client's burden, not mine, especially if I am not the CPA from day one, and it disappears at year 7, too.

I keep 3 years of paper files & scan the older ones each year into pdf files. The paper files have what I’ve printed out to prepare the return (haven’t gotten past that yet) but I have more data in my online client files. Then I have ‘old’ client pdf files that I really have to go through & delete.

I'm pretty much paperless. Everything on the hard drive and cloud backup.

You may also want to check with your State Board for licensee record retention requirements.