Top 5 Client Record Retention Questions
Retention of client records has long been a hot topic for NJCPA members and an area of confusion for all CPAs. The questions most often asked are as follows:
1. What records do we have to return to the client upon their request?
New Jersey State Board of Accountancy's Regulations (NJ regs) §13:29-3.16 – Records require licensees to furnish to their clients or former clients a copy of the following:
- The client’s tax return
- Any report or other document issued by the CPA for such client
- Any accounting or other records belonging to, or obtained from or on behalf of, the client
- Copy of the licensee’s working papers, to the extent that such working papers include records which would ordinarily constitute part of the client’s books and records.
The NJ regs are very short and concise and therefore give us little guidance on what documents can be considered client records and what represent CPA working papers. However, we do get significant guidance on this issue from the American Institute’s Code of Profession Conduct (AICPA Code) §1.400.200 Record Requests under the “Acts Discreditable” section:
- §1.400.200.01 c. Client-provided records are accounting or other records, including hardcopy and electronic reproductions of such records, belonging to the client that were provided to the member by, or on behalf of, the client.
- §1.400.200.01 d. Member-prepared records are accounting or other records that the member was not specifically engaged to prepare and that are not in the client’s books and records or are otherwise not available to the client, thus rendering the client’s financial information incomplete. Examples include adjusting, closing, combining, or consolidating journal entries (including computations supporting such entries) and supporting schedules and documents that the member proposed or prepared as part of an engagement (for example, an audit).
For example, if your client provides you with what appears to be a copy of his or her Form 1099, you should consider that copy to be part of your client’s records and subject to being returned.
The question you must ask yourself in determining what other workpapers may be considered clients records is: Can someone else complete the work without that schedule? If the answer is no, then it would constitute client books and records and must be returned to the client upon request.
The AICPA Code also provides guidance on member’s workpapers that do NOT constitute client records and therefore do not have to be returned to the client:
- §1.400.200.01 f. Working papers are all other items prepared solely for purposes of the engagement and include items prepared by the
i. member, such as audit programs, analytical review schedules, and statistical sampling results and analyses.
ii. client at the request of the member and reflecting testing or other work done by the member.
2. How quickly must we comply with a client’s request to provide records?
NJ regs require you to comply with a client’s request for records within a “reasonable time”; but they do not quantify what constitutes a reasonable time. However, the AICPA Code §1.400.100.09 does: A member who is required to return or provide records to the client should comply with the client’s request as soon as practicable but, absent extenuating circumstances, no later than 45 days after the request is made.
3. What medium should be used to provide the information to the client?
If you maintain your client’s general ledger using bookkeeping software such as QuickBooks, and a client or former client requests that you provide them with the QuickBooks file instead of a printout of the general ledger, do you have to give them the electronic version? This issue is addressed in AICPA Code sections:
- §1.400.100.08: In fulfilling a request for client-provided records, member-prepared records, or a member’s work products, the member may provide the requested records in any format usable by the client. However, the member is not required to convert records that are not in electronic format to electronic format. If the client requests records in a specific format and the records are available in such format within the member’s custody and control, the client’s request should be honored. In addition, the member is not required to provide the client with formulas, unless the formulas support the client’s underlying accounting or other records.
- §1.400.200.02 Members must comply with the rules and regulations of authoritative regulatory bodies, such as the member’s state board(s) of accountancy, when the member performs services for a client and is subject to the rules and regulations of such regulatory body.
Since the NJ regs do not address this issue, a New Jersey CPA should follow the AICPA Code and therefore should provide the client or former client with electronic version(s) of client records when requested if available.
4. Can I require that fees due on an engagement be paid before client records are provided to the client and can I charge a fee for time and cost related to providing such records?
AICPA Code §1.400.200.08 allows a members to charge the client a reasonable fee for the time and expense incurred to retrieve and copy such records and since the NJ regs are silent on this issues such additional charges should be allowed by a NJ CPA. However, even though the AICPA Code goes on to say “and require that such fee be paid prior to the time such records are provided to the client”, since NJ regs are clear on this issue: “A licensee or the licensee's firm shall NOT withhold client records for the non-payment of fees for services,” this part of the AICPA Code would NOT apply to a CPA.
Furthermore AICPA Code §1.400.200.04 also allows a member to withhold client records for unpaid new or previously charged fees under the following circumstances:
- fees are due to the member for the specific work product;
- the work product is incomplete;
- for purposes of complying with professional standards (for example, withholding an audit
- report due to outstanding audit issues); or
- threatened or outstanding litigation exists concerning the engagement or member’s work.
Treasury Department Circular 230 also addresses this issue for tax related documents in §10.28- Return of client’s records, which states, “The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility under this section. Nevertheless, if applicable state law allows or permits the retention of client’s records by a practitioner in the case of a dispute over fees for services rendered, the practitioner need only return those records that must be attached to the tax return.”
Accordingly, since Circular 230 refers to state laws not AICPA rules, and as discussed above the NJ Regs are clear on this issue, a NJ CPA would be in violation of both the NJ Regs and Treasury Circular 230 if they held back client records for payment of fees under any circumstances regardless of the AICPA Code exceptions.
5. Can I provide client documents or tecords to others?
Although not a records retention issue and not addressed by the NJ regs, this is an important issue. There are two IRS Code sections that address assessment of penalties on tax preparers when providing copies of client tax information to persons other than the client.
IRC§ 6103(c) is a civil penalty provision that states “the disclosure of tax returns to partners, S corporation shareholders and estate and trust beneficiaries shall not include any supporting schedules, attachments or lists which include taxpayer identification information of a person other than the entity or the person receiving the tax return.” Accordingly, tax preparers and tax matter partners/shareholders responsible for maintaining the client copy of tax returns need to either remove or redact K-1s and any other attachments to tax returns that include such identity information, especially social security numbers. This includes not only disclosure to third parties such as bankers, but also other partners, shareholders or beneficiaries.
Much more troubling to tax preparers when it comes to IRS penalties relating to disclosure of client tax information is IRC §7216 and the recent update to the Regulations. The revised Regulations, effective Jan. 1, 2009, provide specific language that must be used when obtaining a client’s permission to disclose their tax information to third parties. In particular, such authorization must be in writing and signed in ink to avoid assessment of penalties under this Code section. The AICPA has guidance and sample disclosure forms available on their website, aicpa.org. However, since §7216 is a criminal penalty provision, which includes up to one year in prison for a willful violation, CPAs should refrain from sending client tax information to third parties and instead send the requested documents to the client for them to forward to the third party.
If you still have questions about these issues, please forward your them to NJCPA Vice President of Government Relations Jeff Kaszerman at firstname.lastname@example.org
, and the Professional Conduct Committee will be happy to assist you in understanding the applicable rules.