How to go paperless at a tax firm

A firm is paperless for a process when none of these still depend on a physical sheet:

• The client getting the request
• The document arriving
• Someone in the firm being able to find it
• The preparer working from it
• The signed copy going back to the client
• The archive you would hand an examiner

You can still accept a paper drop off. The rule is that it is scanned the same day, named, filed, and the paper is either returned or stored in a dated box that is not the working file. The working file is the electronic one. Once files are electronic, send each one to a named folder and owner. That routing map is in document routing for a tax or CPA firm.

Do this for the current season first. Back scanning 12 years of cabinets is how paperless projects die.

Publication 583 says you may use an electronic storage system, and that every requirement that applies to paper books and records also applies to that system. The system must index, store, preserve, retrieve and reproduce the records in a legible format. It must give a complete and accurate record that the IRS can get to. The original paper may be destroyed only after you have tested that the system reproduces records in line with IRS rules for electronic storage, and you have procedures to keep it that way. You still have to keep any other records you are required to keep. The IRS may test the system, including equipment, indexing, software and retrieval. That test is not treated as an examination. (Publication 583)

The detail sits in Rev. Proc. 97-22. An electronic storage system is one that images paper to electronic media, or transfers computerised books and records to electronic media. Using a third party to host it does not move the duty off you. Among other things the system must:

• Transfer the records completely and accurately
• Index, store, preserve, retrieve and reproduce them
• Have reasonable controls so records are not created, changed, deleted or left to rot without anyone noticing
• Have a quality check you actually run
• Reproduce a hard copy that is legible (you can identify each letter and number) and readable (you can recognise words and complete numbers)
• Cross reference source documents to the books so there is an audit trail
• Stay available, with the hardware, software and people needed to retrieve a file, for as long as the contents may matter under the tax law

If you stop maintaining the hardware and software needed to read the files, Rev. Proc. 97-22 treats those records as destroyed unless they remain available some other way that still meets the procedure. (Rev. Proc. 97-22)

This is not legal advice. It is the bar your portal, scanner and archive have to clear. If you cannot find last year's W-2 by client and year in a minute, you do not have an indexing system yet.

Pick one structure and write it on a single page. Everyone on the team uses it, including seasonal staff.

Type names in the table skip hyphens on purpose so a search still works. The forms themselves stay W-2, 1099-B, K-1. Do not add a fifth folder called Misc. If you do not know the type, park it in a Review folder that admin empties daily.

IRS guidance on supporting documents is to keep them in an orderly fashion, organised by year and type of income or expense. (What kind of records should I keep) Your client files should be at least that tidy.

If paper still arrives, run one intake desk, not a scanner at every chair.

• Same day. A stack that waits until Friday is a lost document.
• Remove staples. Scan both sides if either side has ink.
• Look at page one before you put the paper down. If it is dark, skewed or cut off, scan it again.
• Name the file using the scheme above before it leaves the scan folder.
• If the client dropped it off, send a short note: what you received, by form, so they do not also upload a worse photo later.

Run a monthly retrieval drill. Pick five random clients. Ask a staff member who did not file the documents to pull a named item. If they cannot, the index is the problem, not the scanner.

New documents should not start as paper. One portal, one request, one list. Email attachments and photos in a text thread break the index. Tell clients in the engagement letter and in the first request: this is how you send things. If they bring a folder to the office, you scan it on the spot and hand it back.

A simple client note you can reuse:

Please upload through the link in this message. Do not email attachments. If you only have paper, take one photo per page in good light, or drop the originals at the office and we will scan them while you wait. Name nothing on your side. We will file them.

Chasing the ones who still do not upload is a different job. Use the collection system and, if you want the reminders drafted, the tax season operator. Going paperless without a chase process just moves the pile into a portal nobody looks at. If that portal is Drake Portals, the checklist and Drake E-Sign Online steps are the Drake Tax documents and electronic signature workflow.

If you are choosing what to automate after the portal is the only front door, see what small accounting firms should automate first.

Keep records that support an item of income, deduction or credit until the period of limitations for that return runs out. Returns filed before the due date are treated as filed on the due date. The IRS also tells you to keep copies of the filed returns themselves. (How long should I keep records?)

When tax time is over, do not throw the files until you have checked other duties: your state board, your insurer, your engagement letters. The IRS says records you no longer need for tax may still be needed by an insurer or a creditor. (How long should I keep records?) This table is not a retention policy. The written policy, schedule and destruction log are the record retention policy for CPA firms. Have counsel or your insurer look at the policy before you delete anything.

Rev. Proc. 97-22 lets you destroy original paper after two things are true. You have tested the electronic system and shown that it reproduces records in line with the procedure. And you have procedures that keep it that way. Until both are true, keep the paper or keep a second copy you can actually read. (Rev. Proc. 97-22)

A practical test for a small firm, once a quarter:

• Pick 25 files at random from the current year and one older year you still have to keep.
• Open each one. Confirm every page is there, upright and readable.
• Print two of them. Confirm the print is readable without zoom tricks.
• Have someone who did not scan them find a named W-2 using only the index.
• Write down what failed. Fix the process before you throw a box away.

Publication 583 also reminds you that if the electronic system does not meet the requirements, you can be in trouble unless you still keep the original paper in a way that lets you and the IRS determine the correct tax. (Publication 583) Do not skip the test to free a closet.