Statutory retention periods for business records

Leg­is­la­tion sets deadlines for business document retention oblig­a­tions for business owners that meet certain criteria. The statutory retention periods are mainly there for the purpose of verifying trans­ac­tions relevant to tax and com­mer­cial law. Cor­re­spond­ing re­quire­ments emerge from various leg­isla­tive rulings.

We’ll give you an overview of the legal bases for retention oblig­a­tions, break down who is obliged to keep business records, under what con­di­tions, and provide you with a list of documents subject to retention of their re­spec­tive deadlines.

In the USA, both tax au­thor­i­ties and business agencies require busi­ness­es to retain records for taxation and civil com­pli­ance.

• The Internal Revenue Service (IRS) require busi­ness­es to keep financial records in the case of a tax audit
• The Equal Em­ploy­ment Op­por­tu­ni­ty Com­mis­sion (EEOC) require busi­ness­es to keep em­ploy­ment records for their staff
• The Fair Labor Standards Act (FLSA) requires busi­ness­es to keep payroll records
• The Sarbanes-Oxley Act (SOX) outline record­keep­ing re­quire­ments for public and private busi­ness­es.
• Depending on the state where your business is located, local laws could also apply.

All merchants are required to keep business records. The legal form of your company may also dictate ad­di­tion­al details for business document retention.

As­so­ci­a­tions, charities and clubs also have document retention periods that they must comply with in order to provide tax or income status.

While it can sometimes be unclear who is ul­ti­mate­ly re­spon­si­ble for book­keep­ing within a business or or­ga­ni­za­tion, tax retention periods are the re­spon­si­bil­i­ty of everyone who handles and creates business records within a company. Anyone re­spon­si­ble for the man­age­ment of the books should have a company-wide record­keep­ing procedure in place.

Any business or entity who vol­un­tar­i­ly choose to make tax-relevant records available despite not being obligated to do so, are also required to follow document retention periods.

Leg­is­la­tors often provide guide­lines for the orderly storage of documents relevant to tax law or com­mer­cial codes. The principle of order ap­plic­a­ble, and the location where the documents are stored are left up to the business owner, provided that they ensure that the documents are available within a rea­son­able time, should there be an audit.

Leg­is­la­tion usually only requires retention of the document’s original form on paper for opening balance sheets and financial state­ments (in­di­vid­ual and con­sol­i­dat­ed financial state­ments including notes), as well as for certain customs documents. These must be printed and signed, even if they have been created using elec­tron­ic data pro­cess­ing (EDP) pro­ce­dures. For all other documents subject to retention, elec­tron­ic storage is usually suf­fi­cient, provided that the re­pro­duc­tion is con­sis­tent with the prin­ci­ples of proper ac­count­ing and that the following pre­req­ui­sites are filled:

• The data must cor­re­spond fig­u­ra­tive­ly with business letters, booking documents and all other documents in terms of content.
• In the case of tests, the documents on image and data carriers must be readable and evaluated by a machine within an ap­pro­pri­ate amount of time.

Image carriers include all media that allow a pictorial image of the original (for example, pho­tographs, pho­to­copies or microfilm record­ings).

Various elec­tron­ic storage media (CDs, hard drives, magnetic tape, etc.) are available as data carriers for business document contents.

Retention periods in place for taxation purposes also enforce the afore­men­tioned policy. Although there is no leg­is­la­tion that dictates a par­tic­u­lar type of computer ac­count­ing software or record­keep­ing software, any and all software used to record tax documents, books, records and business documents must comply with the following con­di­tions:

• The documents must be kept in such a way that an expert third party will be able to examine the documents within a rea­son­able time frame.
• Documents created or received in elec­tron­ic format must be kept elec­tron­i­cal­ly. You cannot delete the file and simply keep a print out.
• If paper documents are trans­ferred to elec­tron­ic form, the re­spec­tive procedure must be doc­u­ment­ed in an or­ga­ni­za­tion­al in­struc­tion. This, too, is subject to retention.

If documents have been com­plete­ly converted to an elec­tron­ic form with all the ap­pro­pri­ate metadata created, then the original paper document may be destroyed. Be careful though, as once a paper document is destroyed, there’s often no getting them back. If you are unsure what you should be keeping as a paper file, or what can be kept only in digital format, please consult a legal pro­fes­sion­al to ensure you are def­i­nite­ly compliant. In general, we recommend keeping hard copies of the following types of documents:

• Proof of tax re­mu­ner­a­tion
• Proof of reg­is­tra­tion with your Secretary of State
• Any certified or notarized documents
• Powers of attorney
• Paper documents with a signature
• Ad­mis­sions of guilt
• Findings of guilt
• Guar­an­tees
• In­her­i­tance cer­tifi­cates
• I-O-Us
• Donation cer­tifi­cates
• Tax cer­tifi­cates

Business owners must grant the IRS and state tax au­thor­i­ties access to all computer systems used to process tax-relevant documents in the event of an external audit. Al­ter­na­tive­ly, the tax office may require business owners to provide this data at their own expense on a machine-evaluable data carrier.

Documents that are subject to retention oblig­a­tions are generally divided into four groupings:

1. Business books, in­ven­to­ries, balance sheets, annual financial state­ments, man­age­ment reports, con­sol­i­dat­ed financial state­ments, group man­age­ment reports, as well as all work in­struc­tions and other or­ga­ni­za­tion­al documents
    
2. Business letters received
    
3. Copies of business letters sent
    
4. Ac­count­ing documents

The retention periods for retaining a document depends on the category. Periods can range between 3-10 years for IRS documents, in­di­vid­ual state retention periods can be found on your local Secretary of State website.

The following table gives you an overview of the most important business documents and their retention periods (in al­pha­bet­i­cal order). Ensuring that you follow these should keep you in line with your federal retention oblig­a­tions:

Table: Retention periods for business records

Emails can be con­sid­ered to be business letters: Whenever trans­ac­tions are prepared, concluded, carried out or canceled via email, the elec­tron­ic message is then con­sid­ered a business letter and cannot simply be deleted. Emails are therefore also subject to retention periods. As a rule, emails must be kept in the corporate context for 6 years. However, the rule only applies to business emails. If employees write personal emails to one another, these do not need to be archived.

Correct Email archiving is therefore an important aspect of document retention. Since manual archiving is very tedious, there is special software that can assist with legally compliant email archiving. Ap­pro­pri­ate programs ensure that emails are stored correctly. Elec­tron­ic archiving also ensures that the stored emails can be searched by a machine. This way, all in­for­ma­tion is being kept available, both for the company and any in­ves­ti­gat­ing au­thor­i­ties.

The retention period generally begins at the end of the calendar year when the documents were created or amended. In certain cases, the retention period may end up taking longer than the law requires. Documents should be kept longer than the legally mandated period if:

• An audit is currently being carried out
• Tax has only been pro­vi­sion­al­ly assessed
• Criminal pros­e­cu­tion or fine pro­ceed­ings are pending
• The company still requires the documents for an ap­pli­ca­tion

Business owners who destroy documents that are subject to retention before the deadline risk massive dis­ad­van­tages in civil pro­ceed­ings, since the probative value of the documents are lost in their de­struc­tion.

In the worst-case scenario, any breaching of document retention is also con­sid­ered to be a violation of ac­count­ing or recording oblig­a­tions, which can have serious con­se­quences. If the tax office questions the account’s probative power due to a lack of doc­u­men­ta­tion, the authority may be entitled to estimate the taxable amount based on previous figures which may be a problem if numbers have dras­ti­cal­ly changed within a year. In addition, under certain con­di­tions, a breach of retention oblig­a­tions may be pun­ish­able by tax evasion charges or a tax penalty for neg­li­gence.

De­stroy­ing documents subject to retention periods can have criminal con­se­quences – es­pe­cial­ly in the context of impending over-in­debt­ed­ness or in­sol­ven­cy. Anyone who destroys, conceals or damages evidence can be found guilty. In the event of a bank­rupt­cy offence, this could be up to five years jail time.

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