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Document Retention in an Electronic Age
There is a whole new ball game in the field of records retention since the 2001 Second U.S. Circuit Court decision in Residential Funding Corp. v. DeGeorge Financial Corp. (306 F. 3d 99). The case at the circuit court level was an appeal from a trial finding against a DeGeorge Financial motion Corp. for sanctions against Residential Funding Corp. for not providing some emails in time for the trial. The Circuit Court held that even if such emails did not support the case, the motion should not have been denied on that basis. The case was sent back for a renewed hearing on discovery. This case involved a $96.4 million jury verdict. In 2006 Morgan Stanley & Co. had to pay a $15 million fine for not providing emails requested as part of a case. However, these rulings said nothing about the size of a verdict or company and create precedent for future cases. Presumably even small business operators, even in home office situations, might encounter similar legal issues.
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Watch That Delete Key!
It is no longer considered advisable to simply delete email that might possible cause a later concern. This was clear in the headline-making cases dealing with email retention at Enron, Arthur Andersen and Merrill Lynch. Of course, no one thinks it is cost effective to save all electronic data, even with the best intentions. Also, a lot of email exchanges consist of repetitious data in that people repeat the content from previous threads. Eventually electronic storage needs could grow beyond any reason. Therefore, what should be kept, not only in electronic format but paper as well and for how long a period of time is important.
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Retaining Problem Emails
A lot will depend on the nature of your business. For example, if there are any employees, then any email that might at some point raise questions of the business running afoul of racial or sexual problems should be kept. Any PDFs or graphics files created for customers should be saved in backup. Taking just a bit of thought and writing out your own email retention policy is a good step. It does not have to be complex because most home businesses will not generate the extensive email files the way large companies do.
For email records, the simplest way might be to set up specific folders in your mail handling software for potential problem areas. It pays to think worst case scenario in this type of planning. Create a reminder, or use an automatic email backup option such as the one with Microsoft Outlook that regularly will copy only those relevant folders to something like a CD-ROM or DVD. Depending on your comfort level move this backup to a safe deposit box at regular intervals.
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Saving Paper Records
As for paper documents, which continue to multiply even in a theoretically paperless office, here are some recognized record keeping guidelines for businesses. In some cases, these may be more stringent than for personal files or even IRS recommendations. When a time frame is given, it refers not to the start of something but when the issue is closed.
Documents related to the formation or operation of a company, contracts, registrations (copyright, patents, trademarks) and legal correspondence: Keep permanently.
Insurance documents: Keep for six years. Claims that have been settled can be discarded after four years.
Tax returns and other tax related records (state sales tax for example): Keep permanently.
The IRS has a guide for keeping business records that every home office should consult. It is Publication 583, Starting a Business and Keeping Records.According to this, if you have employees you must keep all employment tax records for at least four years. As a general IRS rule, keep records that support income or deductions at least until the period of limitations for a tax return expires. This period varies according to different issues that might come up. Consult the IRS publication for specific time periods.
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Be Proactive, Not Reactive with Document Retention
It is all too easy when operating a home office to develop poor habits such as the shoebox record keeping system—throwing everything into a shoebox and planning on sorting it out later. Often, after taxes are done, all this just getsstacked somewhere without a lot of organization. Take a little time up front and save a lot of possible grief down the road!