What Information Must a Tax Preparer Keep on File for the IRS?
Although the IRS does not require that taxpayers keep records, there are several circumstances where taxpayers or their tax preparers may need to access prior year tax information. The primary reason that a tax preparer should keep essential records is because those records may be needed to support entries on your client's return. Fortunately, the list of taxpayer information that should be kept on file by the preparer is relatively short.
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Prior Year Returns
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Tax preparers should keep copies of prior year returns for a multitude of reasons. Prior year returns are often helpful when preparing future returns. They assist the tax preparer in determining the taxpayer's eligibility for certain credits and deductions on the current year return. Also, if the taxpayer's return is pulled for an audit, you will need the taxpayer's tax return to dispute the IRS audit. Even though you can request a copy of the tax return from the IRS, your response time is much quicker if you have the tax return on file. And since the IRS audit notice requires a response within 30 days, your response time is critical.
Receipts
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Receipts serve as supporting documentation for the information listed on the taxpayer's return. And since the IRS statute of limitations allows them 10 years from the date of filing to assess additional tax on a return, then you should maintain receipts for all credits and deductions listed on the return. You should maintain receipts for purchases, expenses, travel, assets, and business transactions. Examples of the types of receipts you should keep include invoices, cash tapes, canceled checks, bank deposits, bank statements, bank deposit slips, credit card statements and purchase and sale notices.
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Social Security Numbers
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Tax preparers should keep the Social Security numbers of everyone listed on their taxpayer's return and store them in a safe, secure area. The reason for keeping the Social Security numbers is because, occasionally, the Social Security Numbers are either transposed while completing the return or during IRS submission return processing. In such cases, you will need to contact the IRS and provide them with the correct Social Security numbers. It is also not a sufficient solution to rely on your client's prior year returns because often taxpayers add and remove dependents from one year to the next. It is, therefore, a good idea to maintain a secure file that includes all of the Social Security numbers that your clients have used and to make a notation for the tax year.
Warning
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There is no statute of limitation on tax evasion. If you have a client who has been accused by the IRS of tax evasion, you should maintain their tax records indefinitely.
Assets
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The tax preparer should also keep information that proves the taxpayer's ownership of assets directly or indirectly referenced on the return. Examples of such information includes a deed to a home or business.
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