Record Retention

Proper retention of your records – more important now than ever

Record retention used to be a mundane matter of file cabinets and boxes stuffed with papers. Now, record retention has gone high tech as new forms of business communication and information storage have become more prevalent.

The manner in which some businesses have handled their records has made the wrong kind of headlines – and helped lead to the demise of a major accounting firm.

Record retention is now subject to increased scrutiny and, in some cases, to increased regulation. But proper record retention is not only a matter of avoiding liability – it is critical to the efficient operation of your business.

Lost records can result in lost time, lost business opportunities and lost tax advantages. In addition, poor record retention can compound the difficulties a business may face if it has to recover from a disaster such as a fire or a successful hacker attack on its computer systems.

Having an appropriate record retention policy and assuring that it is implemented are more important than ever. Those musty files – and that flood of e-mails – are actually valuable property of your business. It's time to start treating them that way!

What do you have to keep ... and for how long?

A key issue facing any business is which records need to be retained and for how long. In view of the document destruction associated with recent corporate scandals, there is now a trend toward requiring records be kept for a longer period than previously thought necessary.

The following list provides general guidance about the length of time various types of records should be retained, either on premises or in off-site storage. But businesses would be wise to consult their professional advisers with respect to requirements imposed by laws or regulations applicable to their particular line of business.

Shareholder agreements, bylaws, minutes and other corporate governance documents

These documents should be retained permanently. Ideally, copies – if not originals – should be in the hands of the business's attorneys.

Key contracts, leases and other agreements, including insurance policies

These records should be retained for at least 10 years after they have expired. If the business has intellectual property that is important to its operations, documents evidencing ownership of that intellectual property, including patents, trademark registrations and supporting documents, should all be retained on a permanent basis.

Depending on the nature of your business, it may also be wise to retain insurance policies permanently since claims can occasionally arise from acts that occurred many years in the past. (This is particularly true of environmental claims.) Keep a copy of the policy to establish the potential for coverage.

Tax returns, non-tax government filings, financial statements and related documents

These documents should be retained permanently.

Payroll records

Also keep these documents permanently.

Financial and accounting records, including journals, ledgers and depreciation schedules

These should generally be kept for 10 years after their creation. However, in the case of assets that may be long-lived or sold at a much later date, invoices or other documents establishing their cost will be required to establish a tax basis. Such documents should be retained indefinitely.

Personnel records

Employee records, including applications, I-9 forms and performance reviews, should be retained for at least seven years following termination of the individual's employment.

In the event of a charge of discrimination, any documents should be kept for four years after resolution of the charge, if that is longer than the seven years after termination of employment.

With respect to job applicants who have not been employed, applications, resumes and replies should be retained for one year after completion.

Bank statements and cancelled checks

These generally may be discarded after seven years. However, if cancelled checks might be required to establish a tax basis or to evidence other significant transactions, copies should be kept indefinitely, preferably with the other documents related to the transaction in question.

Correspondence

This is a broad category and different types of correspondence may need to be retained for different lengths of time. As a general rule, most correspondence should be retained for at least three years.

Correspondence and other documents relating to particular contracts should be retained for as long as the contracts remain in force and for seven years thereafter. The same is true for important assets, including intellectual property, that is essential to the business's operations. In general, retain correspondence that is not purely general in nature for as long as other documents related to the subject matter of the correspondence are retained.

What about electronic records?

E-mail and other information that exists only in electronic form is as much a business record as a paper document and must be retained with the same care. Companies should carefully back up their computer systems and archive e-mail. Given the increasing reliance on e-mail and its role in many lawsuits, the importance of preserving the integrity of electronic information is clear.

Payroll records, ledgers, journals and other financial and statistical information may be converted to electronic form and retained in that manner. However, correspondence, memoranda and other similar documentation should be retained in their original format, as should all contracts, leases, agreements and other legal documents.

How are records properly retained?

Businesses should adopt written record retention policies addressing which records should be retained, for what length of time and in what manner. The policy should also address electronic records, including provision for periodic back-ups and archiving of e-mail and other electronic information, as well as the transferal of electronic information to a read-only format where appropriate.

The policy should provide for document disposition when the retention period has expired. Finally, a specific individual should be given responsibility – and authority – for assuring implementation and compliance with the policy.

What if there's a lawsuit or investigation?

All documents or electronic records that might be pertinent to a lawsuit or investigation should be carefully gathered and preserved. They might help the company defend itself or prosecute a claim. Some attorneys once advised that a document need not be retained unless it had been subpoenaed, but recent events show the hazards of this advice.

Destruction of documents relating to an investigation or lawsuit may result in adverse inferences being drawn, and may be viewed as an obstruction of justice, a criminal offense. Under no circumstances should documents or electronic records that may figure in an investigation be tampered with or destroyed.

How you benefit from our services

Highly trained and experienced staff – Our firm has extensive experience in organizing, managing and assuring the integrity of important information. We can help you develop systems for organizing and retaining your key business records.

Value enhancement advice – We know that record retention systems cost money, but poor record retention can be far more costly. We can help assure that your most important data is preserved in a cost-effective manner. We'll analyze your information systems to maximize their integrity and efficiency.

National access to professionals – Our affiliation with CPAmerica International, a global network of CPA and consulting firms, gives us access to the knowledge of professionals across the country and around the world. We can draw on their insights from serving virtually every industry to provide you with up-to-date information on record retention requirements and systems.

For more information, please call us to make an appointment.

The technical information in this brochure is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.