Navigate The River Of Paperwork With A Record Retention Policy

Maybe you think your company is drowning in a river of old paperwork. The more you shred or toss, the better, right? Actually, no. Think twice before you chuck overboard those 20-year-old workers' compensation policies or defunct contracts.

What's The Big Deal?

To stay on the right side of the law, every company needs a record retention policy covering how to keep and discard printed documents, micrographic reproductions, and electronic files.

Federal and state laws require you to retain records for varying time periods. The Internal Revenue Service (IRS), Occupational Safety and Health Administration (OSHA), and other agencies also have record retention regulations with stiff penalties for noncompliance.

Under the Sarbanes-Oxley Act of 2002 (affecting public companies), you risk up to a 20-year prison term for destroying records related to an investigation or dispute. Finally, if you're sued and fail to produce records you should have retained, the court may assume they would have supported the opposing side's claims.

What Stays, What Goes?

Your policy should cover standard types of records as well as any that are unique to your business. It should also state how long you'll retain each one and how to archive, locate, and when the time comes, destroy it. (See the "Rules Of Destruction" sidebar below.)

Use the same rules for electronic and micrographic records as for comparable paper ones. Just make sure you store them properly and identify them for convenient retrieval.

A good policy should cover the following categories:

Tax returns: Retain copies of federal and state tax returns, adjustments, and amendments indefinitely.

The rules for supporting documents, including accounting records, receipts, invoices, canceled checks, bank statements, and W-2 and 1099 forms tend to be complex. In general, the IRS requires that you keep those records as long as there's a possibility of an audit, assessment, revision, or refund claim. Three years after the filing date is the absolute minimum, and in some circumstances the period can extend several years beyond that.

Employment records: What belongs in this category? Payroll data, benefit plan documents, employment agreements, job descriptions and evaluations, applications and resumes, training programs, discrimination complaints, occupational health and injury records, safety data, and documents related to layoffs and promotions.

How you retain these records is subject to a wide variety of federal statutes. In general, keep any documents relating to an employee for six years after termination. But retain medical and environmental exposure records for 30 years after termination and 30 years after you created the records.

Business governance records: Keep corporate, partnership, and limited liability company (LLC) governance records indefinitely. These include bylaws; partnership and LLC agreements; rosters of directors, executives, owners, and partners; minutes of board of directors, partner, executive committee, and other senior-level meetings; resolutions; and stock transfers.

Contracts: Retain contracts at least until their performances have been completed. And to comply with state law, keep them until the statute of limitations expires for any possible breach of contract action.

Loan documents: Hang on to loan documents and related security agreements for at least the duration of the loan, plus the minimum statute of limitations period.

Real estate property records: You don't have to keep titles and deeds to property once you've recorded them with the appropriate government agency.

Insurance policies: In addition to the applicable statute of limitations period, retain insurance records until coverage expires and you resolve all claims. Keep workers' compensation policies indefinitely.

Environmental records: Don't discard permits, authorizations, safety data, disposal records, service agreements, or other environmental records until you consult with your attorney.

All but the smallest firms should put their policies in writing and train employees to follow them. One person should monitor compliance, update the policy when necessary, and enforce it consistently.

Your legal and tax advisors can guide you in setting retention periods that comply with federal and state laws, industry standards, and good business practices. Have them carefully review your policy and your plans to enforce it.

What Are You Waiting For?

Proper record retention and destruction are absolutely essential to running a successful business. Create a solid policy and follow through consistently, and your company should paddle well clear of legal sandbars.

Sidebar: Rules Of Destruction

The way you destroy records at the end of their retention periods is just as important as how you retain them. Be consistent: Selective destruction can look suspicious. This is particularly true if you destroy documents that relate to a dispute or investigation, while retaining other documents of the same type.

And remember, federal law prohibits intentionally destroying records that pertain to a legal proceeding, administrative hearing, grand jury subpoena, or investigation. Always opt to preserve records that may cast you as blameworthy.

Art Kuesel is with Brown Smith Wallace, the second largest locally owned independent full-service CPA and business consulting firm in Missouri. Brown Smith Wallace has offices in St. Louis, St. Charles, and Chicago. For more information, visit www.bswllc.com or call 314-983-1200.

Publication date: 01/24/2005