Policies help guide tax-record retention

Deciding what to keep

Companies that must decide how to store huge amounts of data may be pressured by different departments in the company and by outside consultants whose views may differ on what should be retained and for how long.

The information technology department, for example, may stress archiving data as soon as possible to improve system performance. Legal consultants may urge record destruction as soon as possible to avoid unnecessary legal exposure, theft or damage. To support the company’s position on tax returns, your tax accountants may insist you keep your records indefinitely. Because keeping every record forever is no longer viable for many taxpayers, it’s important to know which rules govern tax-record retention. Internal Revenue Service procedures require a taxpayer to retain records, make them available on request and provide clear documentation to establish their authenticity and integrity.

Federal income tax regulations require taxpayers to keep their records as long as the contents may be material to the administration of the tax law. More specifically, the IRS can generally audit a taxpayer’s income-tax return up to three years from either the return’s due date or filing date.

Because state statutes vary and can exceed federal statutes, the most prudent answer is typically to maintain a record retention policy for whichever is longest.

Paper records

There are always exceptions, but the specific recommended retention guidelines for paper records include:

• Bank-deposit slips, cancelled checks and entertainment records should be kept for three years from the date of filing or the due date of the return, whichever is later.

• Bank statements should be kept for six years. Also, contracts should be kept for six years after their expiration dates.

• Records such as annual financial statements, corporate stock records and tax returns should be kept permanently.

Machine-sensible records

In addition to paper records, companies must retain machine-sensible records – information in a form that can be read by a specified machine.

For example, if a business has more than $10 million in assets and a portion of the company’s accounting records are maintained on a computer, the IRS requires machine-sensible records be saved in a retrievable format, so information is accessible for determining the correct tax liability.

To comply with this requirement, retain the following specific documentation for all data files: record formats, including the meaning of all codes used to represent information; system and program flowcharts; label descriptions; a list of all applications (source-program listing) used to create the retained files; detailed charts of accounts; evidence that periodic tests are performed on the retained records to ensure access to the stored data; and evidence that retained records reconcile to the company’s books and tax returns.

When deciding on a record-retention policy for your company, it’s advisable to seek legal counsel and obtain more information about IRS compliance issues.

Gary V. Garwitz is a tax partner in BKD LLP’s Springfield office. He may be reached at ggarwitz@bkd.com.