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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