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Tax Record Storage: Record Retention Policy a Helpful Tool

by John E. Curry, BKD, LLP

The sheer volume of data most businesses produce makes record retention an expensive burden, made more complicated with concerns about how long some data—like tax records— must be kept.

As data storage costs continue to rise, an appropriate record retention policy can be a
valuable, cost-saving tool.

Create viable policies
If your company faces problems in how to store huge amounts of data, you may also be
pressured by different departments in the company and by outside consultants whose views may differ on what should be retained and for how long.

Your information technology department may stress archiving data as soon as possible to improve system performance. Legal consultants may urge record destruction as soon as possible to help avoid unnecessary legal exposure, theft or damage. To support the company’s position on tax returns, your tax accountants may insist you keep your records forever.

Because keeping every record forever is no longer viable for many taxpayers, it’s
important to know which rules govern tax record retention. Internal Revenue Service (IRS) procedures re-quire a taxpayer to retain records, make them available on request and provide clear documentation to establish their authenticity and integrity.

Under federal income tax regulations, the general rule requires taxpayers to keep their records as long as the contents may be material to the administration of the tax law. More specifically, the IRS can generally audit a taxpayer’s income tax return up to three years from either the re-turn’s due date or filing date.

Because state statutes vary and can exceed federal statutes, the most prudent answer is typically to maintain a record retention policy for the longer of state or federal statute.

Paper record requirements
There are always exceptions, but the specific recommended retention guidelines for paper records include:

Three Years*
• Bank deposit slips
• Cancelled checks
• Entertainment records

*From the date of filing or due date of the return, whichever is later

Six Years
• Bank statements
• Contracts (after expiration

Permanent
• Annual financial statements
• Corporate stock records
• Tax returns

Machine-sensible record requirements
In addition to paper records, you must retain “machine-sensible” records—information in
a form that can be read by a specified machine.

For example, if your business has more than $10 million in assets and a portion of your
business accounting records are maintained on a computer, the IRS requires machine-sensible records be saved in a retrievable format, so information is accessible for determining the correct tax liability.

To comply with this requirement, retain the following specific documentation for all data
files:

• Record formats, including the meaning of all codes used to represent information
• System and program flowcharts
• Label descriptions
• List of all applications (source-program listing) used to create your retained files
• Detailed charts of accounts
• Evidence you perform periodic tests on the retained records to ensure access to
the data they store
• Evidence that retained records reconcile to your company’s books and tax return

When deciding on a record retention policy for your company, it’s advisable to seek legal advice and obtain more information about IRS compliance issues.

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John E. Curry is a tax manager in the Indianapolis office of BKD, LLP, one of the 10 largest CPA and advisory firms in the United States. Contact the author at jcurry@bkd.com.

About BKD
BKD, LLP (www.bkd.com) is the CPA and advisory firm of choice for growing companies and high net-worth individuals in Central Indiana. As one of the 10 largest such firms in the country, and one of the largest in Indiana, we help clients go beyond their numbers by applying our technical expertise, unmatched client service and disciplined delivery of solutions to their management and financial needs. BKD’s more than 1,600 personnel, including approximately 220 partners, are based in 27 offices within 11 states in the central United States. BKD serves clients worldwide as the largest member firm of Moores Rowland International (MRI), an association of independent accounting firms.