9 Tips For Record keeping You Might Not Know

Keeping records too long is as bad as not keeping any at all!

During my career, I have had clients who keep meticulously organized records going back to their first day in business. I have had clients who just throw everything in a box (plastic bags, shopping bag and yes even Tupperware) that may or may not be sorted by year. And just about every method in between.

Just about all my clients know they should be keeping records and documents to support their business transactions. In fact I cannot remember anyone ever asking if they need to keep records.

However, I am asked over and over:

How long do I need to keep my records?

The answer: However long your Document Retention Policy requires.

Ok, stay with me! I know most small businesses don't have a formal policy about record keeping. But let me tell you a little story about a BIG mistake concerning records.

Anyone remember the late great accounting firm Arthur Andersen?

Back in the 1990's Arthur Andersen (AA) was the auditor for Waste Management. The SEC charged Waste Management with overstating its earning and AA was caught up in the scandal. The SEC found incriminating evidence in AA's records. Records AA kept even though there was no legal requirement to do so. AA ended up paying a record $7 million fine. Ouch!

Fast forward a couple of years and AA has another problem with another client--Enron. In a nutshell AA was their auditor. Once Enron's $100 billion accounting fraud came to light AA was investigated and implicated in the scandal.

AA had put in place a Document Retention Policy after the lesson learned in the Waste Management debacle. But, didn't bother to follow it!

So now the authorities are knocking on the door again. AA discovers the old documents that should have already been destroyed and cranks up the shredders. BIG mistake! AA was convicted of obstruction of justice.

Even though the Supreme Court of the United States later unanimously reversed the conviction...well let's just say too little too late. AA went from a $9 billion firm with 113,000 employees worldwide to just 200 employees operating nothing more than a conference center in Illinois.

I know small businesses don't have to worry about SEC investigations, but a lawsuit could be just as devastating to your business. Even a slight hiccup can be challenging and at the very least the clutter is distracting.

A Document Retention Policy can help a business prevent accidental wrongdoing or the appearance of such. I strongly encourage you create and follow one for your business.

You will need to consider more than accounting records when writing your policy making it really more of a legal issue. I am not a lawyer and do not give legal advice. Taking the time to meet with your attorney about this issue is a good idea.

Where I can give you direct help is with the IRS.

Nobody wants to even hear the "audit" word spoken aloud much less go through one. Record keeping is the key here. Documentation can mean the difference between a clerical error and accusations of fraud.

IRS guidance is pretty general. There are just a few times specific information is required as part of you records. Payroll, travel, entertainment, gifts and transportation are the most common ones.

In General

Keep all the records for the 3-year window of limitations (see the bullet point below for special circumstances). After the (3) three years are over, keep the summary documents for another (4) four years. I recommend you always keep copies of tax returns.

9 tips to remember:

1 - You must keep your accounting records until the time runs out to 1) amend a return for a refund or 2) for the IRS to assess additional tax.

The clock starts ticking on the due date of the return and normally runs for (3) three years. For example - a Form 1040 for 2015 is due April 15, 2016 or if extended October 15, 2016. The normal period of limitations expires April 15 or October 15, 2019.

If a return is filed late that actual filing date starts the clock.

If you underreport your income by 25% of the income included on the return the period of limitations is (6) six years.

If you file a fraudulent return or never file a return there is no time limit.

2 - If you still owe taxes when the return is filed, the period of limitations runs till (2) two years after the tax is fully paid.

3 - If you claim a loss from worthless securities or bad debt the period is (7) seven years.

4 - Keep any records related to property until the period ends for the return reporting the disposal of the property.

5 - Employment records have a period of limitations of (4) four years after the tax becomes due or paid whichever is later.

6 - Digital records must be able to be reproduced "in a legible, readable format."

So if you have vital documents stored on floppy disks or spreadsheets in Lotus 1-2-3 you could have a problem. Digital technology constantly updates. Make sure your old documents keep up with the times.

7 - A cancelled check alone does not prove a business expense. You need evidence that it was for a business purpose.

8 - Records need to be "timely-kept." The IRS suggests a weekly schedule.

9 - Don't panic if your records are incomplete or destroyed. The IRS does allow alternate ways to document expenses. Don't think this is a magical loophole! Willful disregard of the law, rules, and regulations is a MONUMENTAL mistake any way you look at it.

Wow, I know! It doesn't take long to get bogged down in details when it comes to record keeping. This is why I recommend a Document Retention Policy even for small businesses. Take the time to map a policy once and you can easily review and follow it from there on out.

My free guide, "7 Ways to Waste Time & Money in Business (and How to Stop It!)" includes a checklist you can use as a starting point, and have one less detail to worry about.