In this article, we discuss how long businesses in Iowa should keep their records and answer the following questions:
- Does my business need to keep every document?
- How long does my business have to keep each record type?
- What are the consequences of not retaining records for the required amount of time?
Does My Business Need To Keep Every Document?
New businesses have enough to worry about, what with needing to secure financing, working space, hiring employees, developing systems, etc, and on top of all that trying to keep track of which documents can be deleted or shredded and which must be kept for what amount of time. It’s no wonder document management and digital storage companies have flourished over the last 10 to 20 years. But are there certain documents businesses don’t have to keep for X number of years? Does something as trivial and as simple as an e-mail from one co-worker to another need to be filed away on a server for the next 40 years? The easier question is to ask what documents are required by law to be kept for a set amount of time.
The following is a list of documents either required by Iowa law to be held, whether as a physical or digital copy, for a specified period of time or highly suggested to hold onto to resolve any future business conflicts:
- Tax Records, including W-2 forms, 1099 forms, canceled checks, supporting tax documents, bank statements, deposit slips, charitable contributions, etc.
- Credit Card Statements
- IRA and other Retirement Plan Records
- Brokerage and Dividend Reinvestment Statements
- Home and Investment Real Estate Purchase Documents
- Monthly Business Bills
- Loan Documents
- Medical Records
- Military Records
This list does not include certain documents that are considered more for personal use, but if your business is a sole proprietorship you may need to retain other documents not on this list.
How Long Does My Business Have To Keep Each Record Type in Iowa?
Having an organized and thorough record retention system is not only helpful in the event a company gets sued or audited but also makes business planning, tracking business details, and maximizing efficiency much easier. But what’s the golden rule on record retention? And does it matter for a small business versus a large business? Many people throw around 7 years as the gold standard for holding onto a record. After that it’s no longer a legal liability, right? Unfortunately, it’s not that simple and record-keeping should be the same for a small business as it is for a large business. Below is a list of the major document categories and suggestions on how long each should be retained for legal protection:
- Business Income Tax Returns and Supporting Documents - Thankfully, business taxes is one area of document retention that is pretty transparent. The IRS requires that a business retain copies of their tax returns and supporting documents for at least three years. However, the IRS has the legal right to audit a business going back through six years of tax returns. In the case of tax returns, seven years appears to be the golden standard, but it’s not a bad idea to keep a copy of business income tax returns and related correspondence with the IRS permanently.
- Contracts, Leases, and Other Business Agreements - Generally, any contract that the business is part of should be retained permanently or for at least 10 years after the contract is completed. Not only does the business want to protect itself in the event of a lawsuit, but being able to refer to a contract down the road can help a business when writing new contracts.
- Employee Files and Employment Tax Records - The IRS requires that employers retain employment tax records for at least 4 years, but since they can sometimes be pulled into an audit on income tax records, keeping all tax records of any kind for 7 years is good practice. The guidelines for how long to keep employee files is a little more ambiguous. Part of the problem is that there are so many different types of employee files with some having different legal retention times. Generally, any documents related to earnings, payroll, and pension plans require permanent retention. An employee’s file should be retained for 7 years after the employee is fired, quits, or retires. Furthermore, job applicant information must be retained for at least three years even if the individual wasn’t hired. For a large or small company, this alone can be a huge source of paperwork.
- Business Asset Records and Loan Documents - When business property is involved the IRS recommends holding onto any related document for at least one year after the property has been properly disposed of or sold. These records will also help when calculating certain business taxes. Loan documents should be retained through the life of a loan for any business property or contract and then for 7 years after the loan is paid off.
- Medical Records - If a business deals with patients of any kind, medical records should be retained for at least 7 years from the last patient appointment - This also includes any digital or physical copies of medical imaging and test results.
- Canceled Checks, Bank Account Statements, and Credit Card Statements - For the most part, canceled checks without any significant tax or business purpose as well as bank account statements and credit card statements related to the business can be disposed of after 7 years. If a certain account, check, etc. is the subject of a lawsuit or pending litigation the retention time should be extended appropriately.
What are the consequences of not retaining records for the required amount of time?
In our digital era having a good records retention program is easier than it’s ever been. Having said that, some businesses still make mistakes and a document gets destroyed before it can be filed away or stored in digital format. Below is a list of consequences that might befall a business for failure to retain records:
- The business may have to pay extra taxes if it can’t put together accurate tax calculations due to lost records;
- If the business is audited and can’t produce certain tax documents the IRS may require the business to pay additional, unanticipated taxes, or worse;
- Audit failure. If the business fails an audit due to poor record-keeping the business may be slapped with large fines or even suspension and closure of the business.
- Criminal penalties for improper or nonexistent licensure;
- A business that lacks the proper paperwork to defend or justify a legal claim may lose significant funds in a lawsuit for things such as copyright infringement or trade secret violations;
- Failed business deals and nullified contracts. Poor record-keeping practices can severely hamstring an otherwise healthy business. Other businesses won’t want to work with a company that gains a reputation as being disorderly.
If you have specific questions about record-keeping policies in Iowa or your business is looking at a potential lawsuit due to poor record-keeping, give us a call at (563) 503-6910.