If you can answer the following three questions authoritatively, you are well on your way to having a successful records retention program. If you can’t, the questions will help you focus on the areas in which you are vulnerable:
1. Do you have quick access to your organization’s financial documents?
2. Do you know how are your records are maintained?
3. Is there a system in place for backing up critical documents or replacing documents that are lost, stolen or destroyed?The primary goal is to preserve the appropriate records that will produce an accurate accounting of your organization’sincome and expenses.
There are no specific rules established by the IRS regarding how businesses must maintain their records—they may be maintained manually or electronically. But whatever system you establish, ensure that the company and its employees follow it scrupulously.Record keeping guidelines
Records satisfy the tax code as long as they are accurate and can be understood or explained if questioned. The National Federation of Independent Business reports that most businesses employ a blend of electronic and paper record keeping. Less than 10 percent use paper exclusively and about the same percentage use only automation.
Whether your system is manual or automated, you must keep a record of each expense, a brief description of the expense, the date incurred, the amount and to whom it was paid. On the profit side of the equation, you must also keep similar records of any income your business receives,” says Daily.Maintaining key financial documents
Even if you have a tax professional or an outsourced service handling your finances, the law places responsibility for finances on the business. “That means that even if you’ve hired an outside accountant or service to handle your finances, it is still essential to have a grasp of general accounting principles and an awareness of record-keeping practices,” says Daily. “You need to know which documents are considered ‘source’ documents and understand how long to retain them.”
In addition, once you have created your records retention program, it’s critical that everyone in your company, understands how it works and follows the guidelines, stresses document specialist John MacAdams of Shred Nations. “The consequences of even one employee not following your program can make the difference between winning or losing a lawsuit or being in violation of privacy laws. Place your guidelines in your employee handbook and cover it every year with any changes,” says MacAdams.