Record Retention

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Q: How long do you need to keep work papers and file regarding the 1099 and escheat processes? Also, are there any regulations referring to record retention on 1099 and escheat processes?

A: Regarding 1099 reporting records, the IRS instructs that "generally" you must retain most 1099 records for 3 years from the due-date of the return, 4 years for 1099-C and 4 years if backup withholding was imposed. We confirmed this with agent Schroff (ID# 1005950). You can find this in print in IRS 2003
Instructions for Forms 1099, page GEN-8.

Regarding escheatment, a state audit can require all historic records without time limitation. Most states, however, will accept a lookback period of 10 years or less rather than reviewing a company's entire history.

If you are in compliance and report annually, and your question is how long must you retain your unclaimed property reporting documents, the Unclaimed Property Holders Liaison Association (UPHLC) says that while the laws indicate a period of 10 years, in fact some states put the onus on the holder to prove compliance further back than that when the state cannot locate evidence in its own records. In other words, if the state record keeping is poor, they will require you to prove compliance with your records. Therefore the UPHLC recommends that unclaimed property reporting records be retained indefinitely.

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Q: Regarding imaging, my understanding is that the IRS accepts the "best evidence" as support for expenditures. Are companies destroying original documents and relying on images to provide this "best evidence"? Is there someplace in the IRS code that states this explicitly?

A: See
IRS Rev. Proc. 97-22, 1997-13 I.R.B. 9 (Guidance on Electronic Records) and also see http://www.intltaxlaw.com/INBOUND/reporting/rp9722.htm.

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Q: I would like information on the current requirements for record retention.

A: You will find record retention guidelines in our AP Tools section, under AP Templates, entitled
Record Retention Checklist. For additional information, see IRS publication 583.

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Q: We are scanning our paperwork right now, however I am not sure if pdf files are acceptable for audits. Is there any rule on when and if originals can be destroyed?

A: Electronic records are acceptable and original paper documents may be destroyed. Please see the
IRS Revenue Procedure 98-25.

It's important to note that if you retain paper documents along with electronic copies, the paper documents control, i.e. you have to supply the paper documents in an audit. However, making electronic versions of the documents and destroying the paper is acceptable provided that you follow the rules set forth in IRS RP 98-25.

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Q: How long should packing slips be retained?

A: It depends on how you are using the packing list. If you are using it as a receiving document, then you may want to consider saving it similar to the bill of lading, i.e. 7 years.

If you are merely using it as a reference for comparison to what is documented on a separate receiving report, then you may not need retain it.

We also suggest you consult your tax advisor and let them know how you are using the packing list so they could provide you with their advice for tax purposes.

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Q: My company is in the process of automating our Corporate Credit Card Process. Can you tell me whether receipts are still required or if the statement itself can serve as the receipt? Do you know what other companies are doing?

A: The IRS does have guidelines for the type of documentation required to support deductible business expenses. When using a corporate card for expenses such as travel and entertainment, the IRS requires receipts for every expenditure of $75 or more, and all hotels charges. (Note that many companies require a receipt for any expenditure of $25 or more.)

What the IRS is concerned about is the evidence of the transaction. The following is an excerpt from
IRS Publication 463 (click on the link to go to the excerpt: http://www.irs.gov/publications/p463/ch05.html#d0e6382 ), the guidelines that outline the documentary evidence supporting an expense transactions.

"Adequate evidence. Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information.
  • The name and location of the hotel.
  • The dates you stayed there.
  • Separate amounts for charges such as lodging, meals, and telephone calls.
A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information. The name and location of the restaurant.
  • The number of people served.
  • The date and amount of the expense.
  • If a charge is made for items other than food and beverages, the receipt must show that this is the case.
Canceled check. A canceled check, together with a bill from the payee, ordinarily establishes the cost. However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose."

Generally a credit card statement is not sufficient if your p-card transactions involve T&E expenses. However, if your report data satisfies the above information requirement, then you should be in compliance. The key is having supportable evidence for the transaction where you can prove that it was a business expense.

Some companies require their employees to attach their receipts to the credit card statement for at least those expenses meeting their minimum threshold. For instance, if a company sets a threshold of $25 for a receipt, then any transaction of $25 or more on the P-Card statement would require a receipt, otherwise the others that were less than this amount may have notes on the P-Card statement as to what the expense was for.

We encourage you to seek the advice of your tax advisors who know your specific situations and what information you receive on your P-Card reports. Also we encourage you to post your question to the Messaging/Forum section of the site to get feedback from your peers on how they handle their minimum documentation for a P-Card.

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Q: Do you know if there is a receipt retention requirement by the IRS for p-card transactions or is the credit card statement sufficient back up as it is for T&E credit card transactions with the exception of lodging that the IRS still requires a receipt for?

A: The IRS does have certain requirements to support a transaction such as the date, what the transaction was for, and who attended (if it’s an event or a meal/entertainment). Some P-Card vendors can provide you with the necessary support outlined below as part of your statement documentation and, therefore, could be sufficient. It still may require some additional documentation on the statement such as names of participants at a business luncheon.

For travel and entertainment expenses, the IRS requires receipts for every expenditure of $75 or more, and all hotels charges. (Note that many companies require a receipt for any expenditure of $25 or more.)

What the IRS is concerned about is the evidence of the transaction. The following is an excerpt from
IRS Publication 463, the guidelines that outline the documentary evidence supporting an expense transaction such as charges for T&E:

Adequate evidence. Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information:
  • The name and location of the hotel.
  • The dates you stayed there.
  • Separate amounts for charges such as lodging, meals, and telephone calls.
A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information:
  • The name and location of the restaurant.
  • The number of people served.
  • The date and amount of the expense.
  • If a charge is made for items other than food and beverages, the receipt must show that this is the case.
Canceled check. A canceled check, together with a bill from the payee, ordinarily establishes the cost. However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose.

If your T&E expense report data satisfies the above information requirement then you should be in compliance. We also encourage you to seek the advice of your tax advisors who know your specific situations and what information you receive on your T&E expense reports.

With regard to retention of records and receipts, the IRS record guidelines are concerned with any records that are relevant to tax reporting and returns, including records for employment taxes and information reporting. (See IRS Publication 583, Starting a Business and Keeping Records , and also TAPN's Record Retention Checklist).

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Q: Where can I get a record retention guide? I need the info. for all company records (AP, AR, bank, etc.)

A: TAPN provides a
record retention guide in the Tools section, covering accounts payable documents. At the bottom of that guide is a link to IRS publication 583, Starting a Business and Keeping Records, which provides additional guidelines.

For other areas, you should be able to find a number of guides and lists on the Web simply by searching for "record retention guide" or "document retention guide," but be sure to consider the source of the results you find, and be warned, not all records retention guides will agree. For example, while many lists cite 7 years as the length of time to keep accounts payable ledgers and schedules, a few cite 6 years. Here are a few lists we found that you might find helpful: There are also lists available that focus on specific areas in some detail, for example, human resources records (click here), and some states provide information as well, often tied to specific statutes. See the state Web sites.

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Q: We are switching from paper checks to EFT for our payments. We now have large amounts of paperwork containing banking details information lying around. The information has already been scanned into our system. What is the Best Practice for storing/destroying this information? Do we have to store it and for how long?

A: In most cases an electronic copy is acceptable documentation as long as it is readable and has the substance of the transaction, and has adequate safeguards to prevent unauthorized access and alteration. Some companies such as Johnson & Johnson scan all of their invoice documentation and other supporting documentation upon receipt, save it for some period of time, maybe 30 days or less, and then destroy it. Other companies may keep it longer so that there is adequate time for its technology services group to perform backup archives on electronic data so that they are sure a copy has been archived in case of a system crash. The timing depends on your organization's back up routine.

As far as record retention you can find a general guideline in TAPN's AP Tool Suite under the topic "AP Tools" and go to "AP Accounting Forms and Checklist Templates" and look for the record retention template. Or link directly to it:
http://www.theaccountspayablenetwork.com/html/pafiledb3/pafiledb.php?action=file&id=118&category=5

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Q: How long do you need to keep work papers and file regarding the 1099 and escheat processes? Also, are there any regulations referring to record retention on 1099 and escheat processes?

A: Regarding 1099 reporting records, the IRS instructs that "generally" you must retain most 1099 records for 3 years from the due-date of the return, 4 years for 1099-C and 4 years if backup withholding was imposed. We confirmed this with agent Schroff (ID# 1005950). You can find this in print in IRS 2003
Instructions for Forms 1099, page GEN-8.

Regarding escheatment, a state audit can require all historic records without time limitation. Most states, however, will accept a lookback period of 10 years or less rather than reviewing a company's entire history.

If you are in compliance and report annually, and your question is how long must you retain your unclaimed property reporting documents, the Unclaimed Property Professionals Organization (UPPO, formerly UPHLC) says that while the laws indicate a period of 10 years, in fact some states put the onus on the holder to prove compliance further back than that when the state cannot locate evidence in its own records. In other words, if the state record keeping is poor, they will require you to prove compliance with your records. Therefore the UPPO recommends that unclaimed property reporting records be retained indefinitely.

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Q: I would like to get a clear itemization of the rules relating to:
  1. Appropriate backup for an A/P voucher package
  2. Appropriate backup for employee reimbursement and travel expenses
A: Although rules can differ based on your state and what industry you’re in, the IRS does have some basic guidelines when it comes to record retention. These rules can be found in
IRS Publication 583. The IRS requires businesses keep supporting financial documents, which include deposit slips, receipt books and invoices. The IRS requires supporting documents be stored for a specific amount of time depending on the type of expense.

The amount of time records must be kept depends on your business’s tax filing status. If you:
  • File a claim for a loss from worthless securities or a bad debt deduction, you must keep records for seven years
  • File a claim for credit or tax refund after you’ve already filed, you must keep records for two or three years after tax was paid; whichever is later
  • Filed a fraudulent return or did not file at all, you must always keep records
  • Recorded too little income on your return and the unreported amount is more than 25 percent of your gross income, you must keep records for six years
  • Filed a return and owe additional taxes, you must keep records for three years
As a rule of thumb, businesses are instructed to keep invoices for at least seven years which supports all of the time periods above unless you are aware of a fraudulently filed tax return.

Travel and expense reimbursement records are addressed in Publication 463. There are many rules governing what qualifies as an adequate record. Under an accountable reimbursement plan, employees must provide proof of expense. Adequate proof can be receipts or other documentary evidence listing the date, location and the business reason for the expense. Records of these expenses are to be kept, either written or electronic, for three years. Many companies keep them seven years for consistency with the retention time noted above for invoices.

Documentary evidence (receipts) is needed to support expenses for all cases except the following exceptions:
  • The employee was reimbursed using a per diem allowance. While the employee must prove the expenses were business-related, receipts are not needed for tax purposes
  • If the expense is less than $75, no receipts are required unless the expense is for lodging.
  • Receipts are not needed for transportation costs, for which receipts are not readily available
Record retention is discussed in Publication 583 on page 11, under “Recordkeeping.” The link is: http://www.irs.gov/pub/irs-pdf/p583.pdf

Travel and Expense records are discussed in Publication 463 on page 25, under “Recordkeeping.” The link is: http://www.irs.gov/pub/irs-pdf/p463.pdf

At TAPN in the AP Tools Suite, under the topic "AP Accounting Forms and Checklist Templates", is an example record retention template that follows the IRS guidelines. Click on the link to go directly to the template: http://www.theaccountspayablenetwork.com/html/pafiledb3/pafiledb.php?action=file&id=118&category=5

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Q: What are the best practices for keeping vendor statements? Should they be filed or thrown away?

A: Your question depends on your company's business practices including your record retention policy. Some companies do not maintain statements once they reconcile them against what they have in their AP system. The rationale is that they do not want to mix up payment by invoice versus a statement. However, other companies will keep the reconciliation, date stamp it and file it. They may retain the statement based on their record retention policy or they discard the reconciliation after the month end close.

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Q: Would scanning and attaching original W-8 forms to financial records be following IRS requirements? The records could then be reproduce copy if needed.

A: We contacted Marino Nicholas with the IRS, who indicated that imaging your W-8 forms is permitted. He has forwarded a
“field service advice” memorandum to confirm—see the attached document.

It says, in part: “… the Service has determined that a payor can satisfy the 'books and records' requirement by imaging its paper Forms W-8 and W-9 and maintaining them in an electronic system in accordance with Rev. Proc. 97-22, 1997-1 C.B. 652.”

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Q: We are considering using our document imaging system to store our deposit support. This would involve imaging valid checks that are being deposited. Our banking manager has significant concern that we would be liable for any fraudulent activity that may arise from unauthorized access to these checks and feels it would be necessary to stamp them void before imaging them. Are there any "best practices" out there for safely storing these types of documents electronically to avoid possibility of fraudulent activity?

A: Your banking manager is correct to be concerned about security. Here are a few recommendations regarding imaging checks for storage:
  • The MICR information should be eliminated from the image – this information is a fraudster’s ticket to steal
  • Mark the check “void”
  • Deface the signature area
  • Make sure your electronic document storage system incorporates controls and limits access to the image files. Put control procedures in place around your imaging process and record access.
  • Consider cyber liability insurance in a form that would protect you from employee or third party fraud if they broke through your security system to the area where this information is stored.
You might want to contact the
Enterprise Content Management Association for ideas regarding electronic record storage solutions.

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