Practices and Procedures · Rules and penalties

Keeping copies or lists of returns prepared

Retention is the preparer obligation most often satisfied by accident and most often measured wrongly. A firm that keeps every return indefinitely complies without thinking about it. A firm that purges on a calendar-year cycle may not, because the period runs from the close of a return period that begins on 1 July — and because a return presented in one period but due in the next is measured from the later one.

The rule

The duty and the choice. A tax return preparer must, for the period ending 3 years after the close of the return period, either retain a completed copy of the return or claim, or retain a list showing the taxpayer’s name and identifying number — and must make the copy or list available for inspection on request by the Secretary (IRC § 6107(b)). The obligation is 3 years after the close of the return period — a completed copy, or a list of taxpayer names and identifying numbers^TY2026.

What the list must contain. The regulation is more specific than the statute. A signing preparer must either retain a completed copy, or retain a record — by list, card file or otherwise — of the taxpayer’s name, identifying number and taxable year, and the type of return or claim prepared (Reg. § 1.6107-1(b)(1)(i)). Separately, and in both cases, the preparer must retain a record for each return presented to the taxpayer of the name of the individual preparer required to sign it under § 1.6695-1(b) (Reg. § 1.6107-1(b)(1)(ii)). That second record is not optional and is not satisfied by the first.

How the three years is measured. The material must be kept for the 3-year period following the close of the return period during which the return was presented to the taxpayer for signature. But where a return becomes due, with extensions, during a later return period than the one in which it was presented, the material is kept for 3 years following the close of that later return period (Reg. § 1.6107-1(b)(2)). A return period is the 12-month period beginning on 1 July each year^TY2026 (IRC § 6060(c)).

Dissolution does not end it. If a corporation or partnership subject to the duty dissolves before the three years run, the persons responsible under state law for winding up are subject to the retention requirement on the entity’s behalf until the period completes. Where state law names no one, the directors or general partners are collectively subject to it (Reg. § 1.6107-1(b)(2)).

The penalty. Failing to comply with § 6107(b) costs $65 per return or claim, capped at $33,000^TY2026 for each such failure, unless due to reasonable cause and not willful neglect (IRC § 6695(d)). The cap under this subsection runs per return period — not per calendar year, as it does for § 6695(a), (b) and (c).

And a Circular 230 overlay. Retention failures sit alongside the professional obligations, and a practitioner who cannot produce records requested by the IRS may face § 10.20 as well.

Current figures

How it works in practice

Almost every firm keeps copies, so the statutory choice between a copy and a list looks academic. It is not, for two reasons. First, a firm that relies on the list option must capture four items — name, identifying number, taxable year and type of return — and a client roster carrying only names and numbers is short of the regulation. Second, the signer record under § 1.6107-1(b)(1)(ii) is required whichever route is taken, and a firm that keeps full copies often assumes those copies satisfy everything. They do if the signature appears on them; the regulation asks for a record of who was required to sign each return presented, which for a firm using a substitute signer is not always the person on the copy.

The measurement rule is the practical trap. A return presented in June for a client on extension, becoming due the following January, sits in one return period at presentation and another at due date. The three years then runs from the close of the later period — roughly a year longer than a naive reading gives. A firm purging on presentation date alone will destroy records early on exactly the files most likely to be examined.

The cap is worth noting against its neighbours. Sections 6695(a), (b) and (c) cap per calendar year; §§ 6695(d) and (e) cap per return period. Since a return period straddles two calendar years, the same firm can hit two different cap cycles in the same season depending on which failure it committed.

Dissolution is where the obligation surprises people. Winding up a practice does not extinguish the duty; it transfers it to whoever state law makes responsible for winding up, and failing that to the directors or general partners collectively. A practitioner closing a firm should assume the records travel with them.

How this has changed

The current regulation is T.D. 9436 (73 FR 78437, 22 December 2008), applicable to returns and claims filed after 31 December 2008. That amendment introduced the separate signer record in § 1.6107-1(b)(1)(ii), spelled out the later-return-period measurement for returns that become due in a subsequent period, and added the dissolution rule that carries the obligation to those winding up. The § 6695(d) amount was flat when enacted and is now indexed under § 6695(h), so it rises annually with the other § 6695 figures.

Exam focus

Know that the preparer may keep either a copy or a list, and know the four items a list requires. Know that the record of who was required to sign is required in both cases. Measure the three years from the close of the return period, know that a return period begins on 1 July, and know the later-period rule for returns that become due afterwards. Distinguish the per-return-period cap in § 6695(d) from the calendar-year caps in § 6695(a) to (c). Expect a dissolution fact pattern.

Check yourself

1. A preparer choosing the list option rather than retaining copies must record, for each return: (A) The taxpayer’s name and identifying number (B) The name, identifying number, taxable year, and type of return or claim (C) The full return as filed (D) Only the taxable year Answer: B. Reg. § 1.6107-1(b)(1)(i)(B).

2. A return period for these purposes is: (A) The calendar year (B) The 12-month period beginning 1 July (C) The taxpayer’s taxable year (D) The filing season Answer: B. IRC § 6060(c).

3. A return is presented for signature in June 2026 and, with extensions, becomes due in December 2026. Records must be retained until: (A) Three years after June 2026 (B) Three years after the close of the return period ending 30 June 2027 (C) Three years after filing (D) Six years after presentation Answer: B. The return became due during the later return period.

4. A partnership that prepared returns dissolves before the retention period expires. The obligation: (A) Ends with the partnership (B) Passes to those responsible under state law for winding up, or failing that to the general partners collectively (C) Passes to the successor firm only (D) Passes to the clients Answer: B.

5. The maximum penalty under IRC 6695(d) is measured: (A) Per calendar year (B) Per return period (C) Per taxpayer (D) There is no maximum Answer: B, unlike the calendar-year caps in § 6695(a) to (c).