Maintaining accurate records gives a more complete view of your financial situation, putting you in a better position to effectively manage your company and ensure ongoing profitability. Not only that, a comprehensive record retention policy can protect you in the event of an IRS audit or unforeseen legal matters.
Examples of important records to retain include:
At a minimum, you’ll want to comply with the IRS’s statute of limitations: Keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return or, if later, three years after the tax return’s original due date.
Bear in mind that you’ll need to hang on to certain records beyond the statute of limitations. It’s wise to keep tax returns themselves forever. It’s okay to shred the supporting documents after the statute of limitations runs out, but you never know when you might need a copy of an individual or business tax return.
The IRS, U.S. Department of Labor, American Payroll Association, and U.S. Citizenship and Immigration Services, all recommend timeframes for keeping specific records. Click here for a record retention schedule based on the American Institute of CPAs recommendations.
When in doubt, don’t throw it out. It’s easy to accumulate a mountain of paperwork from years’ worth of tax and financial records. Guidelines are available as to what you should keep and what you can discard. If you’re still unsure whether you’ll need a document, a good rule of thumb is to hold on to it.
Security is the name of the game. If you’re planning on keeping hard copy records, make sure you store them in a locked location on premise. In case of disaster, it’s a good idea to also keep a set of backup records in a safe place away from the original set. This is more easily accomplished now that many financial institutions provide statements electronically and other financial information is readily available on the Internet. Even if the original records are on paper, they can be scanned into an electronic format.
Speaking of electronic records, you should have a backup set for those too. Use an external hard drive, USB flash drive, CD, or DVD and put them in a safety deposit box or other secure location. There are many services available online for safekeeping of your electronic records in the cloud. Research all your options and determine which one works best for you.
Whatever policies and procedures you’ve put in place for record retention, make sure you’re following them consistently. Include this important step in your employee handbooks and orientation talking points. Even one misplaced document could cause major headaches if it’s needed as proof for the IRS or in a court of law.
Written by: Evelyn West - Senior Staff Accountant
Phone: 574.289.4011, x242