Saving Your Bacon: Guidance on Record Retention

By Paula Vuksic, CPA, Citrin Cooperman  – March 1, 2017
Saving Your Bacon: Guidance on Record Retention

The safety of company records and data is paramount to the survival of any business. Disasters happen. Minimizing the loss of data can mean the difference between staying in business and losing the business. As professional advisors, you cannot over-stress to your clients that having access to back-up data can really save their bacon.

There are, of course, other less por­tentous reasons to advise your clients to keep and retain their company records. These include something as simple as access to bank statements or cancelled checks, without having to pay retrieval fees, or having the ability to respond to record requests during an audit or other business transaction.

Having a record retention policy can really help a business owner stay on top of what paperwork they ought to keep, how long specific records should be kept, and how to store and retrieve their business data. Electronic document imaging is the preferred method of data storage, replacing paper file cabinets and large storage areas. There are myriad software options that not only scan, organize and store records, but automatically convert tax returns, bookkeeping data, work papers and other documents to PDFs and save them in a virtual filing cabinet.

Which Records to Keep

Some records should never be thrown out and will instead become part of the business permanent file. These include tax returns, legal documents, trust documents, mortgage satisfaction letters, vital records and pension records. Other records have a certain shelf-life. Advise your clients to gather all records and sort them by year and then type; this will help when they want to start shredding.

A business owner should keep all records that relate to running their business — especially financial records such as original gross receipts, purchase invoices, cancelled checks and expense statements. A business should have all the expenses sorted by vendor or category and separated into years. Travel, entertainment and gift expenses are subject to extra scrutiny — see IRS Publication 463, Travel, Entertain­ment, Gift and Car Expenses.

Other sources to consider protecting include voicemail messages, faxes, emails, instant messages, document images, electronic working papers and paper documents. If a company’s policy does not cover all of these areas, the policy should be reviewed and updated.

Now how long should a client keep these records? Well, it depends.

How Long Should Records Be Kept

A company’s record retention policy must address how long records need to be maintained. This depends on the types of documents and any laws or regulations that define the holding period. Since some rules differ from state to state, CPAs should consult with their legal counsel on these items. Table 1 provides recommended retention periods for various document types. A more comprehensive list is located at finance.duke.edu/accounting/ gap/m200-240.php. IRS Publication 583, Starting a Business and Keeping Records, is a good resource as well for more details on recordkeeping.

Table 1

RETENTION PERIOD TYPES OF DOCUMENTS
3-4 Years Bank deposit slips and reconciliations, interim financial statements, sales and vendor invoices, depreciation schedules, employee personnel records1, and travel, entertainment and gift expenses — subject to extra scrutiny (see IRS Publication 463)
7 Years Accounts payable and accounts receivable ledgers, canceled checks (except as shown in permanent records), bank loans (after payoff), bank statements, expired contracts, employee payroll and time records, insurance records, inventory records (except LIFO), expired leases, payroll tax records, mortgage payoff
Permanent Annual audited financial statements, canceled checks (for tax payments, fixed asset purchases, etc.), chart of accounts, company minutes, corporate stock records, general ledgers, IRS audit reports, IRS elections, legal correspondence, LIFO inventory records, real estate records (appraisals, purchase and sell records), retirement plan reports, tax returns and work papers, trademark registrations

 

1 Employment tax records should be kept for four years after filing the fourth quarter for the year. This includes employee information (names, addresses, social security numbers and dates of employment) as well as tax deposits and returns. 



Paula Vuksic

Paula Vuksic, CPA, MST, is a tax partner at Citrin Cooperman specializing in high net worth individuals, closely held businesses across a range of industries, and estates and trusts.

This article appeared in the March/April 2017 issue of New Jersey CPA magazine. Read the full issue.