Keeping detailed records has never been easier than in the digital age. This should come as joyful news to any business.
Record retention refers to the way a business stores and uses data for a set period of time. Although many in the workforce prefer physical paper, electronic storage is a safer and more reliable option. Failure to comply with retention requirements could result in major tax and legal issues, and, unfortunately, Uncle Sam is not very forgiving when one loses a document.
It is crucial for a business to decide what works best for them when navigating record retention guidelines. Some companies might stick to paper, others electronic, and some will go with a hybrid. Each method has pros and cons, and it is important for a business to carefully consider the most efficient and accurate record retention system. There are many factors to consider when deciding on a record retention strategy:
- Convenience and Flexibility – A system that provides an easy way to share documents is best. Electronic storage systems provide for easy transportation of what could be multiple physical boxes of information, in a single mouse click. However, there are risks of malicious third parties who try to hack into a system and steal data if it’s not properly secured.
- Reliability – Paper documentation is extremely dependable and is not susceptible to power outages and server failures. However, it is susceptible to floods, fires and other natural disasters. It is true that electronic records can also be damaged or destroyed, but it is much easier to create backups and recover lost work.
- Security and Privacy – Cybercrimes are on the rise with an average of 2,244 cybercrime attempts per day in the U.S. alone. If a company wants to use electronic recordkeeping, it is important to develop internal controls to ensure the security of customer data. A business should never rely solely on a software vendor to provide security.
- Storage – While paper records are tangible and can run out of space, electronic storage is nearly infinite. If a company outgrows its own servers, it is easy to find off-site storage facilities that will safely harbor records.
- Costs – Although this factor might have been different 10 years ago, electronic record retention is the cheapest option for almost every business. Year after year, the cost of storage goes down, making electronic storage a cheap option for businesses of all sizes.
Once a method is chosen, the organization should develop a document retention policy. A document retention policy spells out how long a business keeps different types of data, how it formats data, where the data is stored, how long the data is stored, and the disposal process for the data. A fully developed document retention policy makes data more accessible, reduces storage costs, helps consolidate document storage, and can provide an improved process for disaster recovery.
Deciding how long a business should retain documents can pose a challenge; a helpful tip is to look at the statute of limitations for various operating procedures, and then add a year. For example, most tax returns have a statute of limitations of three years for most items and a statute of limitations of six years for significant understatements. It would be recommended that businesses retain tax return data for a minimum of four years, or seven years if they want to be cautious.
Record retention procedures are not a one-size-fits-all approach. It is important for any business to do due diligence before deciding on a document retention policy. If you have any questions on how document retention implementation strategies can benefit your organization, please contact our team at [email protected].
About Schneider Downs Tax Services
Schneider Downs’ tax advisors have experience and expertise in a wide range of industries, including Automotive, Construction, Real Estate, Manufacturing, Energy & Resources, Higher Education, Not-for-profits, Transportation and others. Our industry knowledge and focus ensure the delivery of technical tax strategies that can be implemented as practical business initiatives.
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