Thursday, September 10, 2009


By “law” I am required to keep on file all “open” tax returns I have prepared for a fee. In theory, though I expect rarely in practice, the IRS can walk into my office and ask to see all the 2006, 2007 and 2008 federal income tax returns I have prepared.

I go beyond that requirement. In addition to all of the 2006, 2007 and 2008 returns I have prepared, I have on file in my home office every tax return I have ever filed in my own practice in the past 38 tax seasons who are (1) still alive and (2) whose return I have prepared in the past 3 or 4 years.

I do not have my mentor Jim Gill’s client files for returns prior to 1994 – although for some clients I have special files that go back to 1984, and for one client I have copies of returns back to the late 1960s.

I do not automatically shred non-open returns for clients who have left to go elsewhere (whom I, and my mentor before me, referred to as “lost lambs”) because we found that most of these “lost lambs” eventually return to “the fold” after two or so years of seeing what else is “out there” (in terms of quality of service and cost). In most cases I will welcome “lost lambs” back with open arms – although there are some clients I do not ever want to hear from again.

You never know when information on a long past prior year return will come in handy.

Recently a client sent me a copy of her Social Security Statement. There was “0” earnings listed in three of the years in the client’s “Your Earnings Record” – 1985, 1994 and 1995. I was asked if I could identify the amount of missing earnings for the 3 years.

Since I had been preparing the client’s tax returns since 1982 I pulled out her file, found the tax returns for the three years in question, and was able to provide the information requested.

I attach copies of various subsidiary statements and worksheets to my file copy of a completed return. Often time this includes copies of year-end brokerage statements that indicate investment purchases. Having such extensive client files has come in very handy many times over the years when trying to determine cost basis of investments sold (the client rarely saves the purchase confirm, and with individual brokers as well as the clients themselves moving from one brokerage house to another several times over the years the firm’s year-end statement does not always show complete cost basis information).

In the case of stocks with dividend reinvestment I can go back at least as far as the first return I prepared for a client to add up the dividends reinvested over the years when the investment is sold.

Included in my special report MY BEST TAX ADVICE (email for details on how to purchase – or wait for upcoming special offer in future post) I discuss “record retention” for the individual taxpayer. I have a similar philosophy when it comes keeping copies of your 1040s –

First let me say that it is my belief that you should keep the paper copy of your tax returns (Form 1040 or 1040A plus all supporting federal Schedules and Forms) forever. This provides a permanent record of your financial history. You never know when the information on a prior year’s tax return will come in handy for a variety of tax or financial reasons, or just to satisfy personal curiosity.”

So tax pro and taxpayer alike - don’t throw away copies of 1040s (or 1040As). You never know when they might come in handy.


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