Good Record Keeping Practices You Should Know

I don’t know about you, but paper represents a major problem for me at home and in the office. How long should I keep records of purchases like appliances, real estate, or assets used in a business? Should I keep copies of bills and invoices? Discarding records that should be kept poses a wide range of potential tax and legal problems. Keeping records too long wastes space and resources and can even create additional risk of data theft.

Good record keeping practices are important because they will help you monitor the progress of your business, prepare financial statements, identify sources of income, keep track of deductible expenses, keep track of cost basis in property, prepare tax returns, and support items reported on your tax returns.

A variety of laws and many government agencies require record retention but be aware that record retention requirements for individuals will be different than record retention requirements for businesses. Business records that set policy, establish guidelines or procedures, certify a transaction, or are a receipt should be kept for longer periods of time than copies of personal bills or purchase receipts.

According to the IRS, "The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep records that support an item of income, deduction, or credit shown on your tax return until the period of limitations for that tax return runs out." In other words, files should be kept as long as they serve a useful purpose or until all legal and regulatory requirements are met. For example, the responsibility to substantiate entries, deductions, and statements made on your personal or business tax returns is known as the burden of proof. The burden of proof belongs to the taxpayer, so you must prove certain expenses to deduct them. The IRS and state governments can audit tax returns for periods ranging from four to six years, so retaining substantiation for that time is important. Keeping substantiating records beyond that time makes unnecessary demands on time and storage space.

In creating a policy of business record retention, consider the laws and government agencies that apply to your business as you develop such policies. Guidelines you must follow will vary depending on your industry and circumstances.

The following laws, acts and agencies require record retention (an exhausting but not an exhaustive list):

• Internal Revenue Service (IRS).
• Federal Insurance Contributions Act (FICA).
• Americans with Disabilities Act (ADA).
• Age Discrimination in Employment Act (ADEA).
• Occupational Safety and Health Act (OSHA).
• Employee Retirement and Income Security Act (ERISA).
• Civil Rights Act of 1964.
• Fair Labor Standards Act (FLSA).
• Family and Medical Leave Act (FMLA).
• Equal Employment Opportunity Commission (EEOC).
• Health Insurance Portability and Accountability Act (HIPAA).
• Federal Unemployment Tax Act (FUTA).

In creating a personal record retention policy, think about the legal reasons or government entities affecting you that would require you to produce records. Nearly everyone is subject to IRS jurisdiction, for example, so you will want to keep records substantiating itemized deductions for four years, but not longer than that. Your tax returns themselves should be kept permanently, but substantiating documents need not be saved permanently.

To prove residency to a state or local government, you may need to have copies of recent utility bills, but copies of bills can otherwise be discarded as soon as the next month’s bill substantiates payment.

For businesses or individuals, if served with a subpoena or request for documents related to legal action, disposal of any documents should be suspended until the legal action has been resolved.

Here are a few general document retention rules to keep in mind:

• Legal documents: It’s best to keep business formation records, deeds, patents and trademark registrations, property appraisals, bill of sale documents and other ownership records indefinitely.
• Business federal tax returns: According to the IRS, tax returns should be kept for three to seven years, depending on the situation. But, if you don’t file a return, the IRS recommends keeping records indefinitely since the statute of limitations never starts running, so never ends. Keep federal tax returns, including payroll tax records, for seven years to stay on the safe side.
• Personnel records: There are federal record retention guidelines for personnel records and they should be reviewed for a precise breakdown of requirements. For instance, documents relating to exposure from harmful agents must be kept for 30 years after employment ends. In contrast, you need to keep OSHA accident forms for five years after the incident.
• Payroll information: The Fair Labor Standards Act requires employers to keep payroll records "for at least three years." In addition, all companies covered by federal anti-discrimination laws must retain indefinitely records showing your reasoning "for paying different wages to employees of opposite sexes in the same establishment."
• Accounting documents: Retain all small business accounting records applicable to your taxes, including depreciation schedules and year-end financial statements, for at least seven years.
• Insurance, other permits, and licenses: Keep all permits, licenses, and insurance policy documents until you receive replacements for expired ones.
• Bank statements: All business banking, credit card, and investment statements, as well as canceled checks, should be kept for seven years, possibly longer, depending on your business or tax circumstances. Personal bank statements don’t need to be retained beyond a few years.
• Hiring records: Keep job advertisements, applications and resumes on file for at least one year.

Click for a more detailed list of documents and recommended retention periods for you to use as a reference. If we can be of assistance in any way, please call or come see us. You are important to us, and we value our interactions with you.