Document retention.

• Author: Ley, Barbara A.

Over the last few years, the concept of document retention has been increasingly discussed and analyzed. As a result, accounting firms have become even more aware of the need to adopt a formal retention policy, to share it with all firm personnel and to inform clients of its existence. This column focuses on the retention of tax files and records. It also presents a sample retention policy and a sample schedule of retention periods; see the exhibit on p. 179. The schedule does not consider the specific requirements of individual states. Thus, accounting firms should seek the counsel necessary to ensure that they meet their local and state regulatory requirements. Further, besides their own state's requirements, firms should also consider the requirements of the states in which their significant clients reside.

Note: The samples in the exhibit are not endorsed documents but, rather, are examples prepared by working practitioners to aid firms in implementing or refining their own retention policies.

Include All Documents in Policy

Historically, paper was the primary means of documenting work. Now, many documents such as files, workpapers, correspondence and final work products are digital. Most offices have a combination of paper and electronic documents, and both types must be included in document retention policies. Once established, policies must be adhered to in a systematic way. The procedures for keeping documents and discarding documents that no longer require retention should be carried out consistently, as should the procedures for any exceptions.

Firms need to be aware of the ease with which e-mail, voice mail and all electronic messages can become public, and the potential negative consequences of this. Even though a firm may purge e-mail regularly, the receivers of electronic messages may keep them forever. As a precaution, messages (whether written or electronic) should not contain any words or language a sender would not want to read on the front page of a newspaper or to hear repeated in court.

Comply with the IRS

An important part of an overall document retention policy is compliance with IRS requirements. All taxpayers are required to keep books and records that sufficiently establish gross income, deductions, credits or other matters required to be shown in tax returns; see Regs. Sec. 1.6001-1(a). For Federal income tax purposes, books and records must be kept for as long as they may become material in the administration of the tax laws, even though "material" is not defined. For practitioners, however, this generally means information on which they rely in preparing client returns. At a minimum, books and records must be retained until the statute of limitations (SOL) expires (including extensions) for each tax year; see Rev. Proc. 98-25, Section 5.01.

Electronic documents: The IRS has published guidance on retaining computer-generated documents and storing documents electronically. The guidance applies both to businesses and individuals. It specifies the basic, essential retention and...