Document Retention: What’s Your Policy?

A common question businesses face is how long their records should be retained. Many businesses have not developed document retention policies, have outdated policies, or simply do not follow their existing policies. A record retention policy provides guidance for how long organizations are to possess various types of business documents including corporate, accounting, taxation, human resources, payroll, insurance, legal, and other types of records.

The following explains why a standardized approach to document retention is important. It also lists the sources of regulations that govern record retention and offers guidelines for developing and implementing a document retention policy.

Why is a document retention policy important?

When businesses keep records for longer than required, it can lead to wasted space and unnecessary costs as well as increased risk in cases of litigation. Disposal of records too soon may lead to tax or legal problems down the road. Adopting a written document retention policy helps ensure that the business will follow consistent guidance for document retention. In addition, the result of a sound policy is that standardized document destruction and deletion practices become a regular practice throughout the business. 

Sources that govern record retention

Recommended document retention periods are derived from various sources and depend on the type of document, the type of entity, the industry, and other factors. Guidance from IRS regulations, the Code of Federal Regulations, employment laws, and other sources should be analyzed prior to developing a policy. The following are brief explanations of some of the sources of guidance:

• IRS Regulation 26 CFR 1. 6001-1:This IRS regulation states that any person “shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information. In addition, the Materiality Rule under this regulation states the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees, and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law.”
• The Guide of Record Retention Requirements in the Code of Federal Regulations, published by the Office of the Federal Register, is a helpful resource regarding federally mandated retention requirements.
• Various employment laws dictate the need to retain human resource and payroll records for certain periods of time and include but are not limited to the Age Discrimination in Employment Act, Americans with Disabilities Act, Civil Rights Act of 1964, Fair Labor Standards Act, Equal Pay Act, Family Medical Leave Act, Occupational Health & Safety Act, and Employee Retirement Income Security Act.
• Applicable statute of limitations periods for claims such as contractual, personal injury, and negligence.

Tips for developing a quality document retention policy

Since there are various sources governing document retention, developing a policy that meets the needs of your company can be difficult. The objective is to retain records for as long as they serve a useful purpose for the business or until all legal and regulatory requirements are met. The following guidance can be used to assist with the development of a policy: 

• Perform a records inventory. Identify records that are regularly created and used by the organization and acknowledge the purpose of the documents. Indicate their location and the format in which they are maintained. This is the starting point from which the retention schedule in the policy is created.
• Know your state’s requirements. It is important to understand the length of your state’s statute of limitations for breach of contract, breach of fiduciary duty, and professional liability claims. Businesses often base their retention periods on these lengths of time.
• Identify statute of limitations periods. Income tax returns generally have a statute of limitations period of three years, or six years if there is a substantial understatement of gross income. Using the rule of thumb to add a year to the statute of limitations period, taxpayers should keep most of their income tax records a minimum of four years, but it may be more prudent to retain them for seven years. Certain documents such as tax returns, the results of a tax audit, general ledgers, and financial statements should normally be retained indefinitely.
• Define retention periods. The retention periods need to be clearly set as a fixed period of time that begins from a readily determined date. If the date from which the retention period runs is poorly defined, interpretations by employees will vary, which will likely result in inconsistent application of the policy.
• Review the record retention policy annually. When performing this review, changes in the types of records the organization receives or produces and changes in governmental and professional requirements or changes in the costs of retaining records should be considered.
• Make it comprehensive. Documents to analyze include all electronic files and memos such as emails, general ledger files, PDF files, or any other form of information that is created and/or stored electronically. Electronic files must be available upon request and must be capable of being retrieved and processed. Keep this in mind when computer systems or software are upgraded.
• Consult with an attorney, insurance carrier, accountant, and other relevant parties prior to finalizing a policy.

Thoughtfully implementing a record retention policy is important for all business entities. The process of developing, implementing, and enforcing a policy will save your company money over the long term. Following a legally sound record retention policy is a best practice that should not be overlooked.