The past year has provided us much to reflect upon, including our dependence upon our files and records. Whether telecommuting or working with a reduced staff in the office, it may be time to declutter the office or clean out the file room.
Organization is a valuable tool in any aspect of business, but especially in records management. Despite the desire to dispose or destroy records, some records should be kept permanently, or for a specified period of time. Yet, with ever increasing costs for office space, perhaps it is time to review your records retention, destruction, and file maintenance policy.
Regardless of whether the paper copy or digital copy is preferred, establishing a system and policy for records management can be an important tool for improving efficiency and reducing costs of storage. In the event of investigation, audit or litigation, a document management policy will offer ease in locating the document and provide an impartial and valid purpose for retention or destruction of documents. Records management policies should be reviewed with counsel for compliance with federal and state law and industry-specific regulations.
Records retention, destruction, and file maintenance policies include both tax and non-tax records. Corporate records, such as incorporation papers, bylaws, charters, operating agreements, meeting minutes and stock records, are examples of permanent records. Many insurance and legal records are also permanent in nature. However, a frank discussion with your insurance agent and your legal counsel is encouraged.
Other policy considerations for non-tax records are service, vendor and sales agreements. Enforcement statutes related to these types of agreements help provide guidance for setting the file retention period. Records for vendor agreements, customer purchase orders, service agreements, and related non-disclosure agreements are often retained for the period of the agreement plus six years. However, some states maintain ten-year statutes of limitations for contract actions.
Personnel and payroll records retention require special care due to immigration laws, the Family and Medical Leave Act, HIPPA, OSHA, and other state and federal laws. General personnel records such as background checks, performance reviews, and salary information are often retained for a six-year period following the employee’s departure from the company. Benefits plan records also are retained for a six-year period following termination of the plan. However, pension and retirement plan records are of a permanent nature.
At the heart of most company files are the financial records. Ledgers, audit reports, audited financial statements, and check registers are permanent records. Generally, most other accounting records, such as bank statements and audit work papers are retained for a period of seven years beyond the current year. Other accounting records, such as monthly financial statements, aging reports, and cash receipts records are retained for a six-year period beyond the current year.
The Internal Revenue Service recommends that records for income, deductions, or credits, be retained for the limitations period ascribed for such records. Generally, tax related records are kept for a period of three years after the filing of a return, claim for refund, or payment of the tax due (whichever is later). However, employment tax records are retained for at least four years after the later of the date when the employment tax is due or is paid. Records regarding bad debt or worthless securities should be retained for a period of seven years.
An exception to the general retention recommendations pertains to real estate records. Tax records for real estate should be held for the limitations period after the sale of the real estate. However, if the real estate is sold as part of a tax deferred exchange, the records should be retained for the limitations period after the sale of the new property. The records include those documents used to compute any depreciation, amortization, or depletion deduction and to determine the gain or loss when you sell or otherwise dispose of the property.
Of interest, the IRS recommends that records be kept for six years regarding unreported income exceeding 25% of gross income that should be reported. The IRS rules require that records be retained indefinitely if no return is filed or if a fraudulent return was filed.
Not all records fit neatly into a specific category. A good starting point is to determine if the records are income tax related. Some documents such as routine correspondence requiring no response may not require an extended retention period. A strong records retention, destruction, and file maintenance policy will assist in guiding the decision to keep or discard records.
If you would like your company’s records retention, destruction, and file maintenance policy reviewed, or if you have questions regarding document retention, please contact Joan Berg (firstname.lastname@example.org) or Len Gambino (email@example.com), or call (312) 648-2300.