Governance: Document Retention

Governance: Document Retention

7th and Final in a Series

As a follow-up to our initial tax tip in this series entitled “Governance Issues for Tax-Exempt Organizations”, which was released on April 25, 2012, WithumSmith+Brown has compiled a list of what we believe to be “best practices” with respect to each topic included in the Federal Form 14114, Governance Check Sheet. This tax tip focuses on Form 14114, Part 7, Document Retention.

FEDERAL FORM 14114, PART 7, DOCUMENT RETENTION

Questions 24 through 26 of Federal Form 14114, Part 7, address issues with respect to an organization’s document retention practices. Outlined below are the questions included in the Document Retention section of the Governance Check Sheet:

Question 24: Does the organization have a written policy for document retention and destruction? If so, does the organization adhere to this written policy?

Question 25: Does the organization’s board contemporaneously document its meetings and retain this documentation?

Question 26: Was the agent’s examination hindered by a lack of necessary documentation?

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BACKGROUND

Document retention and destruction policies were implemented as part of the Sarbanes-Oxley Act of 2002 in response to Enron, WorldCom and other corporate accounting scandals. This act introduced a variety of corporate measures and policies that required organizations to keep a closer eye on, and take more responsibility for, their financial transactions. While most of the provisions of Sarbanes-Oxley are limited to publically traded corporations, some of them – such as document retention – also provide sound practices for tax-exempt organizations to follow.

FEDERAL FORM 990 AND DOCUMENT RETENTION AND DESTRUCTION

The Federal Form 990, Return of Organization Exempt from Income Tax, addresses an organization’s document retention and destruction practices in the Core Form. The instructions to the Form 990 state “A document retention and destruction policy identifies the record retention responsibilities of staff, volunteers, board members, and outsiders for maintaining and documenting the storage and destruction of the organization’s documents and records”.

Core Form, Part VI, Governance, Management and Disclosure, includes question 14 in Section B, Policies, which asks whether or not the organization has a written document retention and destruction policy.

Copies of the IRS Form 990; IRS Not-for-Profit Governance Best Practices document and Federal Form 14114, Governance Check Sheet can each be accessed at the healthcare services section of our Firm’s website.

The Internal Revenue Service (“IRS”) has not provided specific guidance with respect to document retention and destruction as it relates to a tax-exempt organization. Core Form 990, Part VI is evidence of the significance of the applicability of governance and Sarbanes-Oxley to tax-exempt organizations. Although the majority of the provisions contained in Sarbanes-Oxley are not required to be followed by tax-exempt organizations in order to retain tax-exemption, they do provide good, sound policies for a tax-exempt organization to follow with respect to its governance practices.

WS+B RECOMMENDED BEST PRACTICES

Generally, the process of developing a document retention policy involves:

• identifying what types of documents and records, including electronic files, your organization generates,
• determining the appropriate, and legal, length of time to retain them, and
• recording those retention times on a written schedule.

A document retention and destruction policy is vital to a tax-exempt organization. A properly written document retention policy should address both the retention and destruction of certain of an organization’s documents and records in hard copy and/or electronic form. Most importantly, adopting these types of policies ensures that organizations are in compliance with federal laws with respect to document retention and destruction. While many organizations are required to shred and dispose of outdated and unnecessary files, document destruction policies should limit accidental or innocent destruction of pertinent documents. The policy should address documents that may not be destroyed, such as documents and records concerning a matter under investigation and should also provide for the routine destruction of superfluous documents. These policies should also include guidelines with respect to data backup and archiving for handling electronic files such as e-mail and voicemail, as they have the same status as paper files in litigation cases. Ideally, the policy should include a schedule listing types of documents and how long they should be retained. Some documents, such as an organization’s board meeting minutes, should never be destroyed.

A properly written document retention and destruction policy should address, at a minimum, the following areas:

• Purpose of the policy,
• Document retention and destruction procedures,
• A list of corporate documents and records to which the policy applies,
• Procedures for document review,
• A list of individuals within the organization that will implement and enforce the policy, and
• A glossary of terms used throughout the policy.

CONCLUSION

It is important for a tax-exempt organization to create a document retention and destruction policy for all officers, directors, trustees and employees to adhere to. A tax-exempt organization should decide how to address hard copy and electronic documents and records, place a value on each of these documents, decide how long it should hold onto these documents, how it will store them and, ultimately, how it will destroy them. The policy should be reviewed and approved by the organization’s board of trustees or a committee thereof. All of the organization’s employees should be made aware of the document and the importance of adhering to it.

Copies of the IRS Form 990; IRS Not-for-Profit Governance Best Practices document and Federal Form 14114, Governance Check Sheet can each be accessed at the healthcare services section of our Firm’s website.

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