Regarding the retention of client records under Circular 230, which of the following statements is correct when a client requests the return of their records but has not paid the practitioner's fees?

Answer options:

The practitioner may withhold all records, including client-provided documents, until the fee is paid.

The practitioner must return the client's records necessary for the client to comply with federal tax obligations, but may withhold the practitioner's own work product if permitted by state law.

The practitioner must return all records and all work product immediately, regardless of fee status.

The practitioner is required to destroy the records if the client terminates the engagement without paying.

How to approach this question

Distinguish between 'client records' (provided by client) and 'practitioner work product'. Circular 230 prioritizes the client's ability to file tax returns over fee disputes.

Full Answer

B.The practitioner must return the client's records necessary for the client to comply with federal tax obligations, but may withhold the practitioner's own work product if permitted by state law.✓ Correct

The practitioner must return the client's records but may retain copies, even if state law allows a lien for unpaid fees, though the practitioner may be able to withhold certain work product depending on state law.

Under §10.28, a practitioner must return client records. If a fee dispute exists and state law allows a lien, the practitioner must still provide access to records needed for the client to comply with federal tax obligations.

Common mistakes

Believing a CPA can always hold records hostage for fees (common law lien) without realizing Circular 230 overrides this for tax compliance purposes.

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