Don't Throw Anything Away

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This note came to me from James Chapman, EA as a lesson we can learn. The scenario he describes is not unusual. Of course, this would never happen to your clients! Or would it?

    Situation – in 2001 client was MFJ. Client’s husband sustained a large loss in the stock market. They started deducting $3000 per year with the remainder rolling over to the next year through TurboTax. In 2003 the husband dies. The client continues to use TurboTax to do her returns each year. The software continues to deduct the $3000 per year and roll over to the next year the remaining balance. After husband dies she downsizes drastically and moves to a new state (You can see what’s coming right). The 2007 return is now being audited. She disposed of the records of the stock loss and the tax returns several years ago. The brokerage firm has since been bought out, the successor brokerage firm says that they disposed of the records after the proper retention period and so they have no records. We are attempting to get an image copy of the 2001 tax return from the IRS but that takes forever. The Schedule D on the original return would show the information to support the loss-carryover. Even better would be the original brokerage statements but then if frogs had wings….

These days, this difficulty in reproducing old documents is becoming more prevalent as financial institutions are getting bought out and records disappear within the mergers.

Jim's point is that we need to be proactive in reminding clients that all records pertaining to carryover transactions MUST be saved until the end of the proper retention period after the final carryover amount is used up. With the major losses that some people sustained over the last several years this is a topic that everyone needs to be reminded to discuss.


1) When clients ask you how long to keep records - tell them to keep all tax returns and all related documents (1099s, brokerage statements, etc.) forever. You never know when you will be called upon by some government agency to prove a return was filed; or some basis issue.

2) When there is a death in a client's family, along with your condolences, send them a note urging them not to be too hasty in discarding tax returns and other records. In fact, perhaps you can offer your services to help the family sort out what to keep and what to discard. Let's face it, just because a person dies doesn't mean tax issues start. Often a whole new set of problems crops up.

3) When someone is moving and they want to purge and shred...offer the same services.

4) If you don't already keep all your clients records forever...offer them a service - store their important records, including copies of wills, deeds and other long-term information. Store their documents both in hard copy and on electronic media. And make specific arrangements, if you sell your practice or firm, to transfer the archives, too. And to have the buyer notify the family of the new manager of the archives.

5) Include reminders about record-keeping in your annual newsletter, along with a list of items to retain.

Just some thoughts for things you can do at the end of the year to help your clients.


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