Document Retention Policy

Over time, businesses accumulate a wealth of documents and records. While these are important for day-to-day operations and legal compliance, not all information must be kept indefinitely. Maintaining documents beyond their required lifespan can lead to unnecessary storage costs, security risks, and difficulty locating relevant information.

A document retention policy (DRP) provides a clear framework for managing your company’s information lifecycle.

What is a document retention policy?

A document retention policy (DRP) is a roadmap for managing your organization's information lifecycle. It outlines clear guidelines for the retention periods of various document types, considering legal, regulatory, and operational requirements. A well-defined DRP aids in compliance and supports efficient data management by identifying documents eligible for disposal, reducing storage costs, and mitigating risks associated with data overload.

A well-crafted DRP helps you avoid the pitfalls of excessive document retention and allows teams to manage their information assets proactively. It outlines a balance between retaining documents to meet legal obligations and avoiding the risks and costs of keeping them for too long.

For example, while invoices are required for tax purposes, they might also contain personal information that could expose your business to data breaches if not appropriately managed. A document retention policy helps you:

• Identify documents critical to your business operations
• Determine legal requirements for retaining specific documents
• Prepare for potential legal disputes by retaining relevant evidence
• Avoid accusations of destroying documents in bad faith
• Comply with retention requirements from information sources
• Ensure the relevance of all collected information

What is a Good Record Retention Policy?

A solid retention policy is tailored to meet your business's requirements and comply with legal requirements. It must be:

• Comprehensive
  A good DRP covers all documents your organization creates or receives, including physical and electronic formats.
• Easy to Comprehend
  A DRP should be written in plain language that is easily understandable by all employees. It should be free of legal jargon and complex terminology.
• Aligned with Legal and Regulatory Requirements
  Your DRP must comply with all applicable laws and regulations governing document retention in your industry.
• Regularly Reviewed
  Regulations and business needs evolve, so your policy should be regularly review and updated to keep it relevant in changing circumstances.
• Enforced Consistently
  The policy should be communicated to all employees, ensuring accountability for following its guidelines. Regular audits and spot checks can monitor consistent enforcement.

How to Create a Document Retention Policy

Every company operates differently in terms of regulations, types of documents, and resources. Adopting a structured approach maintains efficiency while adhering to legal standards.

Here are the steps involved in crafting a DRP:

1. Evaluate Document Types & Retention Needs:
   • Conduct a thorough audit of your business to identify the types of documents you hold and their current storage locations.
   • Assess legal requirements for document retention, including minimum retention periods and any specific disposal methods.
   • Determine additional reasons for keeping documents beyond mandatory periods and define retention periods for documents without legal requirements.
   • Consider the specific risks associated with your industry and adjust retention periods accordingly.
2. Plan Document Storage & Organization:
   • Develop a system for capturing and storing your documents, both physical and electronic.
   • Categorize documents and arrange them logically for easy retrieval.
   • Implement a registration system to track document existence.
   • Consider restricting access to sensitive documents.
3. Define a Document Disposal Process:
   • Establish a transparent process for disposing of documents, especially those containing personal or sensitive information.
   • Outline who within your organization has the authority to make disposal decisions.
   • Ensure confidential destruction of sensitive information through shredding or secure electronic deletion.
4. Appoint a Document Retention Officer:
   • Designate an employee as the document retention officer, responsible for maintaining and implementing your retention systems.
   • This person will serve as the point of contact for any questions or concerns related to document retention.
5. Draft Your Document Retention Policy:
   • Document your new system and guidelines for employees in a formal policy.
   • Ensure the policy is clear, concise, and easily understandable for all employees.
   • Communicate the policy effectively and provide training to ensure adherence.

How Long Should You Keep Different Types of Documents?

The retention periods for different types of documents vary based on industry, regulations, and the document's purpose. While you must consult with legal and compliance experts to determine the precise retention periods for your organization, here are some general guidelines:

• Financial Records: Retaining financial records for at least seven years is expected, as it aligns with IRS requirements for tax audits. These records include invoices, receipts, bank statements, and tax returns.
• Employee Records: Employee records, such as employment contracts, performance reviews, and payroll information, should generally be retained for at least seven years after an employee's termination.
• Contracts: The retention period for contracts typically extends for the duration of the contract plus a specified period after termination, often ranging from three to seven years. This covers the time to address potential disputes or legal issues that may arise after the contract ends.
• Legal Documents: Legal documents, such as court filings, subpoenas, and litigation-related correspondence, should be retained for the period specified by applicable laws. This also varies depending on the jurisdiction and the type of legal matter.
• Marketing Materials: Marketing materials can primarily be disposed of once they are no longer relevant. However, it's important to consider any legal or regulatory requirements for specific marketing materials.

What are the IRS Rules for Document Retention?

The Internal Revenue Service (IRS) has specific rules for document retention that businesses must adhere to. These rules are designed to ensure that companies have adequate records to support their income, expenses, and tax deductions in the event of an audit.

The duration you must retain documents hinges on the specific action, expense, or event they record. Generally, businesses must keep records that support their income, expenses, and tax deductions for at least three years from the date the tax return was filed or the due date of the return, whichever is later. This timeframe allows you to amend your return for a credit or refund or for the IRS to assess additional tax.

Understanding and adhering to these IRS guidelines ensures compliance and helps you avoid potential penalties. A robust document management system can further assist you in maintaining organized and accessible financial records, making tax season less stressful.