Question: At my business our storage room is overloaded with boxes jammed full of files, invoices, tax returns, bank statements, utility bills, payroll and accounting papers and other documents. It may even be a fire hazard! How can I handle this situation?
Answer: There is a new strategy to get this crushing accumulation of paper under control. Beware: it may require you to change your thinking. Let's talk about this.
At the front end of the computer revolution in the 1990s, people talked about a "paperless society." It didn't really work out that way, did it? Obviously email has cut down markedly on snail-mail, but it sure seems like there's more paper than ever. And think about this: If one person can instantly forward an email to five colleagues, and they all print it out for their files, and perhaps forward it to two others - well, you get the point.
You mentioned a fire hazard. This begs the question: what would you do if you lost all those records? Are they backed up or recoverable in some other way? Let's fix this right now.
In dealing with keeping paperwork, the two old-strategy extremes are: discard or recycle everything quickly, and keep everything indefinitely. Both are impractical. You must keep enough documentation to back up the figures on all the various tax returns that you file. But how much is enough?
The good news is, there is a new model. This recognizes that recent technology is your friend. The new strategy is: scan and shred.
Scanning. The concept is to take information from paper and store it in digital format. The technology is cheap and very good. At the low end may be your existing all-in-one printer with image scanning capability and optical character recognition software.
Above that is a dedicated scanner; some of these have software that can read information from invoices, receipts, business cards, etc., directly into a database. There are compact portable models, too. Store the data on an appropriate-capacity device (thumb drive, disc or hard drive). All of the government taxing agencies will accept a clear, legible digitally scanned document as a substitute for the original.
Shredding. You have numerous options. Rip it in-house with an office shredder ($50 to $100). Above that, bigger hardware is plentiful. Shredding services (they pick up or shred on-site) are available. If data security is a major issue, like medical records or credit reports, ask the shredding service to tell you about their "NAID rating" - AAA is highest.
Below are some general guidelines for document retention. This assumes you and your business are on the straight and narrow. Caution! If you don't follow the rules, there are many exceptions to these guidelines.
Two examples: If you file a fraudulent IRS return (or none), there is no limitation on how far back they can go. Second example: If a company did business within the city of Bellingham but did not register, it can be audited back ten years.
There are five main governmental agencies that can audit most any local business.
Internal Revenue Service: Keep your income tax returns and supporting documents (income and expense records) for three years from the due date of the return, or when it was filed, if later. Keep payroll tax information and records for four years. Certain other information should be retained longer or indefinitely. For details, go to the excellent online booklet irs.gov/pub/irs-pdf/p583.pdf and look at the table on page 15.
State Department of Revenue: Keep all current year records, plus four years back. Note! RCW 82.32.070 says, in part: "Any person who fails to comply ... shall be forever barred from questioning ... the correctness of any assessment of taxes made by the department of revenue ... based upon any period for which such books have not been so kept and preserved."
Their website is dor.wa.gov. Click on "How to prepare for an audit" to watch their instructive video.
Labor and Industries: When you have employees, you have a whole new burden of recordkeeping. Follow the Washington state "five-year" rule. Their website is lni.wa.gov/, click on the "For Business" tab and print out an "Audit Reference Card."
Employment Security: This agency can audit up to seven years back. Keep quarterly returns and supporting payroll data. Information: esd.wa.gov/uitax/audit/index.php.
City of Bellingham: The city can audit Business and Occupation returns four years back, plus the current year. Keep copies of returns and all sales and related records. Website: cob.org/, click on Government tab, then Departments, then Finance.
And last, note that there is a side benefit to electronic data conversion: It frees up that storage room so you can put it to better use.
Ask SCORE is prepared for The Bellingham Herald's Sunday Business section by Bob Dahms, a business counselor with the Bellingham chapter of SCORE. Submit questions for this column to Business Editor Dave Gallagher at dave.gallagher@bellinghamherald.com. To learn more about other small-business matters, contact the local SCORE chapter at 360-685-4259 to schedule an appointment. For details about the organization, visit SCORE.org.
