Document retention

Unless you are involved in some criminal activity, January is a good time for a business to review its document retention policy. A well designed document retention policy that is consistently followed saves a business money.

Business transactions create a lot of business documents, many which are generated for and have to be retained to comply with government regulations. Business meetings generate notes and memos important to customer relationships. Many businesses have important contracts, process designs, records with historical information about high dollar assets, patents and trademarks; information and knowledge that is valuable and recorded by documents. Add to the list correspondence and emails, invoices, bank documents, travel receipts … the volume is enormous. Who knows what documents are to be kept, for how long, and where?

The problem of document retention has plagued American businesses for decades. In 1980 Congress passed The Paperwork Reduction Act, a law designed to implement procedures in the federal government to reduce the paperwork it required of American businesses. The law was amended in 1995. There must have been design flaws in both laws because businesses are still swimming in required reports and business documents.

So now that another year has ended, many businesses have employees looking for space to move the 2014 files and records so they will have room to store  2015 information. With this process comes depletion of cognitive energy spent on deciding what old documents can be shredded or deleted from the server. Ah, if there was only an easy answer.

The most common answer I hear to the question, “How long should I keep my records?” is seven years. This is probably based on IRS requirements. For federal income tax purposes the Internal Revenue Service can examine every return for three years after it is been filed. If a taxpayer’s gross income is understated by more than 25%, then the IRS can examine a filed return up to six years past. Since the statute of limitations doesn’t start until a return is filed, the advice to keep seven years of documentation prevents taxpayers eager to clean out their drawers and closets from destroying potentially needed documentation too soon.

To illustrate, a taxpayer may find she had inadvertently understated her income by more than 25% in 2008. If the original return was filed timely, the assessment period for the 2008 tax year would not end until April 15, 2015, six years from the due date of the original return. Destroying their documentation for 2008 today would be three months and a few days to soon even though the tax year ended more than six years ago.

For individuals that have consistently filed their income tax returns on time, this seven year rule of thumb seems to work well. However if you own or manage a business, a simple rule of thumb can be dangerous. There are other reasons to retain documents besides the Internal Revenue Service. For example, corporate stock certificates and minutes of stockholders meetings and property records should never be destroyed.

Every business, even small ones, should have a written document retention policy. The policy should include a description of what documents should be retained, how they should be retained, what technologies should be used for retention, how they should be organized for easy retrieval, and when they should be destroyed. When crafting your company’s document retention policy, or revising it, it would be prudent to consult with your attorney, accountant, and even regulatory agencies who have oversight authority affecting your business operations. Then when you have developed a satisfactory document retention policy someone should be assigned the responsibility of managing the policy and be held accountable.

So as we all start the new year, and with many of us looking for additional space to store last year’s paperwork and Christmas tree decorations, let me leave you with a few tips and links to resources.

As you close your accounting year, identify the types of documents you generate and consider how you have managed them in the past. If you were required to find documents to back up a business transaction, could you within a reasonable time period? If not, take time to organize your archiving and retrieval system, including digital systems. Digital backup has a tendency to become as disorganized as any paper filing, maybe more. Have you considered what happens to older information as you update computer systems with newer technology? Are there compatibility issues?

If you are a member of a professional association or a business trade association, many of these groups will have published a record retention guide relevant to your industry.

Many government agencies have published information on recordkeeping. These government agencies also have power to assess your business penalties for keeping inadequate records. Here are three links to government publications on recordkeeping requirements: Internal Revenue Service, Department of Labor, Occupational Safety and Health Administration, and the Small Business Administration.

Record retention for businesses is a broad subject. For example, does your company have a policy to retain emails from customers, vendors, employees, or government agencies? Are the digital files on your hard drives really deleted or can they easily be recovered by an opposing law firm?

Recordkeeping and document retention (and destruction) policies are absent in many small and medium size business enterprises and maybe probably underutilized in many large businesses. Only when a lawsuit or an examination by a governmental agency occurs will many business owners or managers become reacquainted with its importance.

If you’re a smaller business with limited resources, keep in mind that an adequate document retention policy begins with a basic bookkeeping and filing system well kept. But you still need to consider which of your business documents need to be kept and for how long.

For any business or individual involved in criminal activity, ignore my advice and immediately consult your attorney. Any effort at good documentation probably doesn’t work in your favor anyway.