The Importance of Document Retention in Your Business

January 13, 2020 | Article

By Jillian Robison

Do you feel buried in paper documents (or hard drives, if you scan everything)? What should you keep and for how long? Do you need to keep it all?

The answer is that it depends. Different laws and regulations require certain documents be retained by a business or individual for varying lengths of time. For example, you may be audited by the IRS with respect to your federal tax return several years after you file it. Or you may be under an employment audit with the Fair Labor Standards Act (FSLA) or the Occupational Safety and Health Administration (OSHA).

Not only are records required for federal agencies, but they’re also required for state agencies like state unemployment or workers compensation. Other things to consider include bank documentation or vendor and customer correspondence to verify receipt/payment or contracts with respect to contract breeches or suits brought against you or an employee acting on your behalf.

Record keeping isn’t just for regulatory purposes.
Proper records can also help you grow your business.

How long do you need to keep copies of your documents?
The period of limitations for income tax returns is generally three years, according to the IRS. This means you keep the records for three years after the date of filing the tax return or two years from the date you paid your tax amount, whichever is later.

Special situations apply, though:

  • If you file a claim for a loss from worthless securities or a bad debt deduction, the IRS recommends you keep the return and documentation for seven years.
  • If you somehow did not report income that you should report and it is more than 25% of the gross income on your return, you should keep records for six years.
  • If you never file a return, you should keep the records forever—there is no limitation if nothing is filed.
  • Keep your records indefinitely if you have ever filed a fraudulent return.

What do you need to keep as part of your document retention?
Items the IRS may expect to see include:

  • Bank statements and reconciliations
  • Accounts receivable records and invoices
  • Accounts payable records and payments
  • Support for tax payments (federal, state, local)
  • Support for deductions taken on return
  • Mileage records
  • Chart of accounts and general ledger files, as applicable

If you purchase things like real estate or stocks, be sure to keep those records around until you sell the item to prove your basis. Then, retain the documents for the three years mentioned above once you file your tax return with the sale included.

For employment documents, the IRS recommends you keep tax records for at least four years after the date the tax is due or paid, whichever is later.

Some documents should be kept forever. A few of those include deeds, minutes of meetings, tax returns, financial statements, legal records and corporate documents.

Other regulatory agencies will require certain specific documents that are not required on your tax return. For example, if you get audited by a state employment agency, they might require time cards. Time cards are not a requirement from the IRS for tax return filings—just the payroll records and reports.

What is the recommendation for overall document retention?
A good practice is to keep records for seven years and have a good system in place so you can easily see what records can be destroyed after that timeframe. This would not include the items you should keep forever, so keep those items in mind as you review your documents.

If you have a system in which something is scanned or stored, put it in a location with a date stamp, so you know seven years from now (or yearend) that those items can be destroyed. The ease of storing files electronically makes document retention easier and cheaper than storing boxes and boxes and boxes.

There are many items to consider with respect to document retention. The best piece of advice is to keep something longer than you should, rather than risk not having it if needed in the future.

Business ownership can be complex.
We’re ready to help you take the confusion and hassle out of accounting and reporting.

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