Recordkeeping Rule Book
In This Chapter
- Storing copies of electronic accounting records
- Holding on to employee records
- Saving your tax returns
- Maintaining other business records
As you’ve seen throughout this book, a wide variety of parties have an interest in your business. This goes far beyond a direct financial stake in your business. Federal, state, and local governments all have an indirect financial interest in your business through the taxes and fees you pay. Lenders, merchant account providers, insurance companies, and even vendors who extend you credit also have an indirect financial interest.
Each of these parties often retains the right to require you to produce copies of various records related to your business for a surprisingly long time. Further, there’s often no rhyme or reason, and you might need to keep records to remain in compliance with state or local regulations for a much longer period of time than the federal government requires. Litigation, such as divorce proceedings or a civil suit filed by a disgruntled customer, vendor, or employee, also could result in situations where you’re compelled to produce documentation.
In this chapter, we discuss the types of records you should plan to retain, and we offer general guidelines on how long you should keep each type of record.
Keep in mind that this is a “trust but verify” situation; it’s impossible for us to give specific guidance that covers every situation. However, we can give you an overview of the range of records you might need to retain, along with an understanding of the expectations the aforementioned stakeholders may have.
Maintaining Your Accounting Records
As you’ve seen in Chapters 12, 18, and 19, businesses can be subjected to a dizzying array of taxes. Each tax return you file can be audited for varying periods of time.
Your best source of documentation is generally your accounting software, so it’s important to keep backup copies of your records. When you’re unable to produce documentation supporting a return you’ve filed, governmental entities may impute values for the return and assess interest and penalties.
DEFINITION
In financial circles, the term impute means to replace missing values with a sometimes arbitrary value. If you can’t verify your revenues were a certain value reported on your return, and the tax auditor feels a higher number is more appropriate, you’ll have a tough time fighting the assertion.
In Chapter 15, we discuss the importance of backing up your data so you can restore your information or protect your records from a disaster-recovery standpoint. You also want to back up your records periodically so you can respond to requests from any of the stakeholders we mentioned at the start of this chapter. Although you’ll want frequent backups of your live accounting data, you might only keep one backup per year for archival purposes. Given the nature of technology, having a duplicate backup from a given accounting year is always a good precaution.
As we discuss in Chapter 3, you might decide at some point to migrate from one accounting program to another. If you move between desktop-based accounting programs, be sure to keep copies of your accounting software installation discs or the program download. A backup of your data won’t do you any good in the future if you don’t also have the corresponding software you can use to access the data.
Recently, Internal Revenue Service (IRS) auditors have demanded a backup of accounting records from your accounting software as part of an examination. Potentially, this can expose far more information to their scrutiny than just the period in question. For cloud-based accounting programs, you’ll have to provide a user ID and password if you’re audited, which means you might not be able to limit the records the tax authorities can examine. Some desktop-based programs, such as QuickBooks, let you produce a copy of your accounting records for a specific period. In QuickBooks, choose File, Utilities, and Condense. You’ll see an option to create a period-specific version of your data you can share with the auditor.
Keeping Employee Records
The significance of maintaining payroll and personnel records transcends many of the other concepts we cover in this book. Not only must you maintain documentation to support the payroll taxes you’ve paid (see Chapter 12), but there are also age, wage, and other statutory requirements you must be able to prove you’ve complied with.
Federal Requirements
IRS Publication 583 states that you must keep all employment tax records for a minimum of 4 years after the employment tax was due or paid. The caveat here is the clock starts based on the later of these two events.
Let’s say your payroll taxes were due to be paid January 15, 2019, but because of an oversight, you actually paid them on July 24, 2019. In this case, you’ll need to hold on to those records until at least July 24, 2023. If you’d paid the taxes on time, you might be able to fire up the shredder on January 15, 2023.
Keep in mind that these are the federal regulations, and as you’ll see, your state or local municipality may have additional recordkeeping requirements.
Unfortunately, the IRS isn’t the only federal agency that has an interest in your employee records. The Equal Employment Opportunity Commission requires that employers keep all personnel and employee records for 1 year—for both active and terminated employees. However, the Age Discrimination in Employment Act and Federal Labor Standards Act both extend this time period to at least 3 years.
As an employer, you not only have to keep track of the federal recordkeeping requirements discussed in the preceding section, but you also must comply with myriad state requirements.
Unfortunately, these are too vast and varied for us to cover in this book, but we can provide an example for one state. The Georgia Department of Labor mandates that employee records must be maintained for up to 7 years. This means Georgia companies must keep any documentation related to their state unemployment tax returns for as many as 3 or 4 years longer than the federal requirements. That’s just for SUTA returns; the Georgia Department of Revenue, to which businesses remit state income tax, could have a different time frame still.
Regulatory approaches vary widely from state to state. This means agency names can also vary. For instance, Hawaii’s Department of Taxation is the equivalent of California’s Franchise Tax Board, which corresponds to the Department of Revenue many other states have. As you’ve read in Chapter 12, every state levies an unemployment tax, typically administered by a Department of Labor, but the agency name could vary. If your state doesn’t offer a centralized online resource for resources, try contacting your governor’s office or a tax professional.
BOTTOM LINE
The American Institute of CPAs maintains a list of all state taxing departments of revenue. You can find it at aicpa.org/Research/ExternalLinks/Pages/TaxesStatesDepartmentsofRevenue.aspx.
Local Requirements
Roughly 13 percent of cities and counties around the country levy income taxes. These represent yet another documentation time table you must keep in mind.
To determine your local requirements, do an internet search with your local jurisdiction and “employer resources.” You also can contact your city councilperson, county commissioner, or mayor’s office, as appropriate, for specific guidance. Governmental agencies at all levels have a vested interest in enabling you to be compliant. A local tax professional can help you navigate the federal, state, and local regulatory terrain as well.
Other Stakeholders
Governmental agencies aren’t the only stakeholders that can require you to provide documentation related to your employees. Assuming your business is subject to workers’ compensation, your insurance carrier can have its own set of requirements with regard to how far back they can look.
Keep in mind that workers’ compensation fraud or even the suspicion of it can reset all clocks.
RED FLAG
The recordkeeping requirements we discuss here all assume you’ve paid your employees and payroll taxes on time and correctly. The clock never stops in situations where taxpayers maliciously or accidentally fail to file returns, withhold employee paychecks, or file fraudulent tax returns. As noted, if you can’t prove your situation, the government will be more than happy to make up numbers that suit its purposes and penalize you accordingly—and in some cases bring criminal charges.
Dealing with Other Records
If you keep every record related to every aspect of your business, particularly on paper, you’ll soon be overrun. In this section, we suggest some ways to triage what records you should absolutely keep, which you should consider keeping, and those you can shred.
Records to Keep Permanently
Plan on finding space to keep the following records indefinitely:
- Any documents that relate to the formation and ownership of a business
- Minutes from meetings of the board of directors, shareholders, and/or partners
- Intellectual property, such as trademarks, copyrights, and patents
- Annual income tax returns along with supporting documentation such as end-of-year financial statements
- Canceled checks or other documentation for payment of income taxes
- Depreciation schedules
- Any documentation related to audits from any governmental agencies, as well as insurers such as workers’ compensation carriers
- Correspondence or documentation related to important legal matters
- Accountant’s audit reports
- Property appraisals
- Stock certificates (Hold for as long as you own the stock.)
- Mortgages, deeds, bills of sale, and vehicle titles for all assets owned
- Accident reports and insurance claims
BOTTOM LINE
Keep any notarized records in paper form with an electronic backup.
Records to Hold Temporarily
As you’ve noted from the employee records section of this chapter, the term temporary can cover a wide span of time. When it comes to saving records for several years but not forever, you’ll find that most records need to be saved for at least 3 years and in some cases up to 7.
Here’s a list of common documents that should be saved for at least 3 years; you’ll see notations for documents that should be saved for 7 years:
- Income tax returns and supporting documentation (Although this appears in the permanent list, it’s included here as well because it’s so important. It’s imperative that you keep income tax returns and supporting documentation for a minimum of 3 years from the date filed or the date due, whichever is later.)
- Bank reconciliations
- Personnel records of current employees (7 years is recommended)
- Personnel records of terminated employees (at least 3 years but longer if there are any pending insurance claims)
- Payroll and related tax records (4 years is recommended)
- Expired insurance policies
- Sales records including invoices sent to customers (7 years is recommended)
- Invoices received from vendors (7 years is recommended)
- Purchase orders
If you use accounting software, it’s possible you won’t have paper documents for items like invoices and purchase orders, so the electronic version will have to do. For anything else on this list, particularly any documents that contain signatures, the original should be retained.
In addition, you should be archiving meaningful correspondence and emails that relate to your business. Your decision on how long to keep those letters and messages depends on the information they contain.
You don’t necessarily need to keep permanent copies on paper of all these items. Most modern accounting programs allow you to attach one or more documents to a given transaction. If you use a document scanner or a scanning app, you can easily convert paper documents to electronic formats and embed them in your accounting software. Do be sure, though, that you understand where your accounting software stores the documents. Cloud-based accounting software uploads the documents automatically, while some desktop-based accounting programs may simply link to a document location on your hard drive. Document links become invalid if you delete a linked document or replace your computer.
On-Demand Records
A benefit to so much of our lives being online these days is that you can look up certain records on demand. You should easily be able to request copies of the following types of records should the need arise:
- Bank statements
- Credit card statements
- Federal income tax returns
The Least You Need to Know
- Always keep duplicate backups of your accounting data from the end of each year.
- Federal guidelines for retaining records may be much shorter than state or local requirements.
- Legal and ownership records must generally be kept permanently, while other business records should be kept for up to 7 years.
- You might not need to keep copies of records you can easily request from your financial institutions.