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Digital documentation:<br />Why you need a document policy

While the vision of a paperless office is still somewhere off in the future, many organizations have reduced their paper consumption, and improved their efficiency, by working almost exclusively with electronic documents.

Fill-in-the-blank forms have given way to the PDFs that are completed onscreen. The follow-up letter is more likely to be a follow-up e-mail. And the file cabinet stuffed with bulging folders is replaced by searchable documents on a disc.

Some estimates state that as much as 90 percent of all business information is created and stored electronically. While some of this information gets committed to paper, much of it remains in a variety of electronic formats that can be stored and eventually archived on hard drives, CDs, magnetic tapes and other media.

But going paperless presents challenges of its own. Even in a digital work environment, managers are faced with deciding which documents to keep, how to keep them and for how long. Answers to these questions are determined in part by government and industry regulations, by technology and by the need for protection in the event of future litigation.

The long shadow of Sarbanes-Oxley remains a powerful motivator for the preservation of financial statements and other accounting data. Other federal and state regulations require that certain documents, including tax returns (see sidebar), be retained for specified periods. As business processes have moved from paper to electronic, companies have had to rethink their document management strategies.

Why you need a written policy

Perhaps the most obvious benefit of electronic documents is lower storage costs and reduced space requirements. Depending on their size, as many as 2 million documents can be stored on fewer than 10 CD-ROMs. But thats just the beginning. With electronic storage and retrieval, you can realize those benefits even if your policy is to save everything forever. The trick is to be able to find what you need quickly and effectively.

Consider that there are two main reasons for retaining documents:

  • Reference  Tax returns, financial statements and other financial data may be needed somewhere down the road.
  • Legal documentation  In fraud investigations, contract disputes and other civil and criminal investigations, both sides of a dispute may find evidence to support their own claim, or contest their opponents, in old documents.

Courts have routinely ruled that electronic documents, including e-mails, must be produced when ordered. In civil and criminal cases, the inability or unwillingness to produce required documents, or the wrongful destruction of documents, especially when an investigation is eminent or underway, can lead to severe penalties, fines and an obstruction of justice charge.

A formalized, systematic document retention program does not make your organization immune to legal action. But it does make it easier and more efficient to produce information when ordered by a court. Juries and judges often rule against organizations that do not have a formal document retention policy, or who only enforce it sporadically.

A written policy that is not consistently followed is worse than no policy at all. Employees need to understand that the policy is in place for reasons that can impact their future employment, and even their personal freedom. Use training, frequent reminders and regular reviews to drive home the point and keep everyone on the same page.

What your policy should include

There are no boilerplate document retention policies. Every business must examine its own operations to determine the most effective system for its needs. That being said, there are a few basic questions that every plan should answer:

  • Who is responsible for enforcing the policy?
  • What specific documents or classifications of documents should be retained (for example, all contracts, all federal and state tax returns, all employee records or all bank statements)?
  • Where will the documents be stored?
  • In what form will the documents be stored (paper, electronic, compact disc, magnetic tape, ZIP drive, etc.)?
  • How long will documents be kept?
  • What changes in processes or procedures are needed to implement the policy?

Enlisting professional help

Even the smallest organization or self-employed individual can find value in the services of an attorney and a financial professional in developing a document retention program. A save everything forever approach can be implemented almost immediately at little or no cost. But the greatest value and protection will result from a policy that is selective, organized and easily accessible in the future.

IRS guidelines for retaining tax returns

A striking example of the acceptance of electronic documents is none other than the IRS. From 2004 to 2005, the number of returns filed in electronic form jumped from 66.3 million to 70.7 million.

IRS Publication 583, Starting a Business and Keeping Records, offers the guidelines outlined in the chart on the left for retaining tax-related documents, regardless of what form they are in.

Type of document: Keep for:
Tax returns (including supporting documentation). Three years from filing date or when the tax was paid, whichever is later (unless 2, 3 or 4 apply).
Tax returns where gross income is underreported by 25% or more. Six years from filing date or when the tax was paid, whichever is later.
A fraudulently filed tax return. Indefinitely.
Amended tax return or claim for a credit or refund. Three years from when original filing or two years from when the original tax was paid, whichever is longer.
A tax return showing a loss form a worthless security or bad debt deduction. Seven years from filing date.
Employment tax records (if you have employees) Four years from when the taxes were due or when they were paid, whichever is later.

 Karl Appelquist, CPA, is a partner with Clifton Gunderson LLP. He can be reached at 217-351-7400 or