The Importance of Records Retention: What You Need to Know

Any responsible business owner and taxpayer has probably heard at some point that it is essential to retain important records. Professional service firms know this mantra well. Sometimes there are specific time periods attached, and sometimes the timeframe is indefinite, as in ‘forever.’ Which one is correct? Why is this necessary?

Annie Mueller, in a 2020 article about document management and record retention in Insight Magazine, a publication by the Illinois CPA Society, wrote, “For their own sake, firms must be able to prove exactly what services were provided and actions were taken. For their clients, firms may be a source of documentation to help solve business, legal, or tax disputes. Clients should be advised that records are retained on a schedule, preferably in the annual engagement letter, and that they are responsible for keeping their own records independently and securely.”

Mueller continued, “Thorough records management, then, is not just about keeping records. A sound records retention system has three key components—schedule, policies, and storage—and once these components are in place, consistent implementation.”

She offered these suggestions:

1. For the records retention schedule, every document is sorted according to class, and each class has its own timeline for retention. It may be helpful or necessary to speak to an attorney about state guidelines pertaining to the statute of limitations on document retention, especially if a firm or company has clients in many states.
2. Establish firm-wide policies for how documents are named, stored, organized, and accessed. Policies must be crystal clear and consistently applied.
3. Set up a formal naming convention for all records. This maintains document organization and ensures that all employees, present and future, will be able to locate needed records.
4. Ensure that the final version of the document is retained and timestamped. Timestamp any other document versions retained to maintain a clear timeline of how the record evolved.
5. Determine whether you will retain documents electronically or via paper copies. For records with an expiration date, detail each step, including client notification, server erasure, shredding, and use of outsourced document services. Obtain a certificate of destruction if you contract this service to a third party.
6. For electronic document storage, data needs to be encrypted. Establish policies about who has access to documents and, especially, who accessed the documents.
7. Establish a company-wide policy about the retention of email to, from, and about clients.
8. Once a schedule, policies, and storage arrangements are established, communicate this information to all employees regularly. It may be helpful to provide employees with the attached records retention cheat sheet compiled by the Illinois CPA Society’s Tax Practice & Procedures Committee.
9. Establish a core group of subject matter experts within the firm who can oversee implementation, education, and answer questions about these policies. Policies need to be re-evaluated periodically and updated as necessary.

Record retention is not glamorous, but it’s an essential part of any business. It requires a lot of thought and work in the beginning to set it up correctly, but once implemented, the effort should pay off handsomely.