File retention requirements

You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property. If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid.

You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes.

For example, your insurance company or creditors may require you to keep them longer than the IRS does. More In File. Period of Limitations that apply to income tax returns Keep records for 3 years if situations 4 , 5 , and 6 below do not apply to you.

Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction. As noted above, to ensure the purposes of the Act are achieved, the final rule requires the retention of materials that not only support the auditor's report but also records that are inconsistent with that report, and sets a seven-year retention period.

It is important to note, however, that the proposed rules do not require the creation of any record; they require only that existing records be maintained for the prescribed time period. In the proposing release, we estimated that adoption of the rule would not result in any significant increase in costs for accounting firms or issuers because the rule would not require the creation of records, would not significantly increase procedures related to the review of documents, and minimal, if any, work would be associated with the retention of these records.

We indicated that the disposal of those records, which would occur in any event, merely would be delayed. In addition, because an already large and ever-increasing portion of the records required to be retained are kept electronically, we stated that the incremental increase in storage costs for documents would not be significant for any firm or for any single audit client.

We recognize, however, that firms may incur some cost to retain access to older technologies as electronic storage technology advances. For purposes of the Paperwork Reduction Act, we estimated in the proposing release the total burden to be 15, burden hours. We received comments indicating that, based on the proposed rule, our cost estimate was low.

Due to revisions made to the rule the cost estimates provided by the commenters, however, may no longer be accurate. As noted previously in this release, we do not believe that Congress intended for accounting firms to duplicate and retain all of the issuer's financial information, records, databases, and reports that might be read, examined, or reviewed by the auditor. Accordingly, we do not believe that the "received" criterion in rule a 1 requires that auditors retain such records and the firm's anticipated document retention costs, therefore, should be significantly reduced.

Regarding the commenter's cost estimates related to potential litigation, we recognize that one purpose of section is to facilitate investigations of potential violations of securities laws and criminal laws, 79 which could impact a firm's litigation costs. Nonetheless, the firm's estimate would appear to be speculative.

If the retention requirements lead to more efficient oversight of the accounting profession then they may result in improved audit quality and enhanced investor confidence in the profession. Other accounting firms noted that many variables would affect the costs related to the rule, and that the ultimate increase in costs is difficult to quantify.

This commenter also noted that adopting the proposed five-year retention requirement would have been more costly than adopting the seven-year retention requirement that is consistent with the forthcoming auditing standard to be promulgated by the Public Company Accounting Oversight Board. In this commenter's view, having two retention periods would have increased costs associated with processing the records.

Section 23 a 2 of the Exchange Act 83 requires the Commission, when adopting rules under the Exchange Act, to consider the anti-competitive effects of any rule it adopts. In addition, Section 2 b of the Securities Act of , 84 Section 3 f of the Exchange Act, 85 and Section 2 c of the Investment Company Act 86 require the Commission, when engaging in rulemaking that requires it to consider or determine whether an action is necessary or appropriate in the public interest, to consider whether the action will promote efficiency, competition, and capital formation.

We believe that rule would not have an adverse impact on competition. To the extent the proposed rules would increase the quality of audits and the efficiency of enforcement and disciplinary proceedings, there might be an increase in investor confidence in the efficacy of the audit process and the efficiency of the securities markets. One commenter agreed that the rule should have no adverse effect on competition. In any event, to the extent the rule has any anti-competitive effect, or impacts efficiency, competition, or capital formation, we believe those effects are necessary and appropriate in furtherance of the goals of implementing section of the Sarbanes-Oxley Act.

It relates to new rule of Regulation S-X, which requires auditors to retain certain audit and review documentation. The rule generally carries out a congressional mandate. The rule, in general, prohibits the destruction for seven years of certain records related to the audit or review of an issuer's or registered investment company's financial statements. The objective of the rule is to implement section of the Sarbanes-Oxley Act in order to increase investor confidence in the audit process and in the reliability of reported financial information.

This is accomplished by defining the records to be retained related to an audit or review of an issuer's financial statements. Having these records available should enhance oversight of corporate reporting and of the performance of auditors and facilitate the enforcement of the securities laws.

One commenter anticipated that the record retention requirements, if adopted as proposed, would have placed an "enormous" burden on small accounting firms, and could have resulted in some firms deciding to no longer audit public companies. These revisions include removing the "cast doubt" language from the rule, which commenters generally viewed as requiring the auditor to retain virtually all documents generated or reviewed during an audit or review, regardless of their relevance or materiality.

We also have adopted a seven-year retention period to coincide with a forthcoming retention requirement to be promulgated by the Public Company Accounting Oversight Board, which, according to one commenter, should reduce processing costs associated with the rule. As a result of these revisions and clarifications, we believe that implementation of the revised rule should be less costly for accounting firms than anticipated by the commenters.

Furthermore, one commenter noted that records management procedures for smaller accounting firms should be the same as they are for larger firms. Our rules do not define "small business" or "small organization" for purposes of accounting firms. Under the new rule, 96 accountants who audit or review an issuer's or registered investment company's financial statements must retain certain records for a period of seven years from conclusion of the audit or review.

The records to be retained include records relevant to the audit or review, such as workpapers and other documents that form the basis of the audit or review and memoranda, correspondence, communications, other documents, and records including electronic records , which are created, sent or received in connection with the audit or review, and contain conclusions, opinions, analyses, or financial data related to the audit or review.

The required retention of audit and review records should discourage the destruction, and assist in the availability, of records that may be relevant to investigations conducted under the securities laws. In the Proposing Release, we estimated that adoption of the rule would not result in any significant increase in costs for accounting firms or issuers because the rule would not require the creation of records, would not significantly increase procedures related to the review of documents, and minimal, if any, work would be associated with the retention of these records.

Regarding the commenter's cost estimates related to potential litigation, we recognize that one purpose of section is to facilitate investigations of potential violations of securities laws, Commission rules and criminal laws, which could impact a firm's litigation costs. The Regulatory Flexibility Act directs us to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities.

In connection with the proposed amendments, we considered the following alternatives:. The Sarbanes-Oxley Act provides the basis for the requirements and timetables for the record retention rules. The rule is designed to require the retention of those records necessary for oversight of the audit process, to enhance the reliability and credibility of financial statements for all public companies, and to facilitate enforcement of the securities laws.

We considered not applying the proposals to small accounting firms. We believe, however, that investors would benefit if accountants subject to the proposed record retention rules, regardless of their size, audit all companies. We do not believe that it is feasible to further clarify, consolidate, or simplify the proposed rules for small entities.

By amending section to add a new discussion at the end of that section under Financial Reporting Release Number 66 FR that includes the text in Section II of this release.

The Codification is a separate publication of the Commission. It will not be published in the Code of Federal Regulations. Authority: 15 U. Significance of a matter shall be determined based on an objective analysis of the facts and circumstances. Such documents and records include, but are not limited to, those documenting a consultation on or resolution of differences in professional judgment. Section states, among other things, that anyone who knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence an investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under the bankruptcy code, or in relation to or contemplation of any such matter or case, may be fined, imprisoned for not more than 20 years, or both.

Section a 1 specifies that: "Any accountant who conducts an audit of an issuer of securities to which section 10A a of the Securities Exchange Act of applies, shall maintain all audit or review workpapers for a period of 5 years from the end of the fiscal period in which the audit or review was concluded. The Commission may, from time to time, amend or supplement the rules and regulations that it is required to promulgate under this section, after adequate notice and an opportunity for comment, in order to ensure that such rules and regulations adequately comport with the purposes of this section.

Section also provides that any person who knowingly and willfully violates subsection a 1 , or any rule or regulation promulgated by the Securities and Exchange Commission under subsection a 2 , may be fined, imprisoned for not more than 10 years, or both.

It further provides that nothing in section shall be deemed to diminish or relieve any person of any other duty or obligation imposed by Federal or State law or regulation to maintain, or refrain from destroying, any document. S July 26, Because investment advisers and broker-dealers are not necessarily issuers, audits of their financial statements required for regulatory purposes are not subject to the rule. In other words, only the audits of the financial statements of investment advisers and broker-dealers meeting the definition of "issuer" in section 10A f are subject to the retention requirements in rule One commenter suggested that investment advisers and broker-dealers be included within the scope of the rule.

Another commenter noted, however, that broadening some but not all rules under the Sarbanes-Oxley Act beyond "issuers" as defined in the Act would be confusing. References to the accountant include any accounting firm with which the certified public or public accountant is affiliated.

See the discussion of Statement on Auditing Standards No. For example, if a company has a calendar year-end fiscal year, for an audit of year financial statements that concludes in February or March , under the proposal, the records would have been required to be retained until January 1, This paragraph also states: "The quality, type, and content of audit documentation are matters of the auditor's professional judgment.

In light of the apparent massive document destruction by Andersen, and the company's apparently misleading document retention policy, even in light of its prior SEC violations, it is intended that the SEC promulgate rules and regulations that require the retention of such substantive material, including material that casts doubt on the views expressed in the audit or review, for such a period as is reasonable and necessary for effective enforcement of the securities laws and the criminal laws, most of which have a five-year statute of limitations.

In addition, the auditor should document findings or issues that in his or her judgment are significant, actions taken to address them including any additional evidence obtained , and the basis for the final conclusions reached. Audit documentation should be sufficient to a enable members of the engagement team with supervision and review responsibilities to understand the nature, timing, extent, and results of auditing procedures performed, and the evidence obtained; b indicate the engagement team member s who performed and reviewed the work; and c show that the accounting records agree or reconcile with the financial statements or other information being reported on.

See, e. It states that "significant audit findings or issues" include:. This literature may provide helpful guidance as to the scope of the term "significant. Moreover, we do not intend for the auditor's subjective judgment of whether a matter is significant to be determinative. Instead, we believe that the more objective test of what may be significant to a reasonable investor should be applied in evaluating whether information is "significant.

Donald G. Circumstances may arise during the file retention period that would postpone the destruction of the file. The paralegal should implement a system to ensure that such circumstances are identified and the destruction date is changed if necessary. Paralegals may consider establishing a file review date preceding the destruction date. The paralegal could then check to determine whether circumstances have changed and the file destruction date should be changed. A paralegal should be guided by ethical, legal and professional considerations as well as economic and practical factors when determining how long to retain a file.

It is not recommended that a paralegal adopt a single retention period for all files. Generally, based on the provisions of the Limitations Act, , an appropriate retention period for client files is 15 years after the file is closed. This guide is not a rule and this suggested time period may not be appropriate for all client files.

Paralegals should use their own judgment when establishing destruction dates for client files based. For example, factors such as the nature and complexity of the matter may require a longer retention period than the suggested 15 years.

The following are some of the factors that a paralegal must or should consider when determining the length of time to retain a file. System for Organizing Closed Files A paralegal should have a system for organizing and retrieving closed files. When a file is closed, the file should be classified as closed.

In some instances, it may be advantageous to store documents electronically rather than in paper files. In making such decisions, the paralegal must ensure compliance with all legal and regulatory obligations.

Other legislation such as the Income Tax Act may have different requirements. If the record or document is to serve as documentary evidence, paralegals should ensure that proper steps are taken to comply with any evidentiary rules governing the admissibility of such documents. To qualify as evidence, imaging and microfilm including microfiche reproductions may have to be produced, controlled and maintained according to certain specifications.

Documents should remain trustworthy, readable, and accessible for the applicable retention periods. In order to ensure the accessibility and readability of documents, the appropriate hardware and software should be maintained during the retention period. Closed files should be stored either on site or in an off-site location.

Regardless of the location, paralegals must ensure that confidentiality is maintained. The storage facility must be secure to maintain confidentiality and to protect the files from damage or loss. If files are stored electronically, paralegals may wish to consider whether to encrypt stored files. When storing files electronically, paralegals should consider both the physical location and the medium e.

Paralegals should have a system for backing up closed files. The paralegal should also ensure that documents, data and information in the file can be accessed during the file retention period. The paralegal should be prepared to convert older electronic formats to new formats so that they continue to be accessible. In addition, it may be useful to include on any list of electronic files, the file format in which the documents are saved so as to facilitate conversion of the document at a future date.

As part of the file closing procedure, the paralegal primarily responsible for the file or if this is not possible another paralegal in the firm, should consider reviewing the file again prior to destruction to ensure that circumstances have not changed since the establishment of the destruction date and that the file destruction should proceed.

Alternatively, the firm might implement a system to ensure that where there is a change in circumstances prior to the destruction date, the file is reviewed and the destruction date is changed if necessary.

Files that are to be retained indefinitely may be reviewed periodically, perhaps 10 or 20 year intervals, to determine whether there has been any change in circumstances that would now allow for the destruction of the file. Paralegals must ensure that they maintain confidentiality when disposing of files.

If paper documents are shredded or incinerated, the paralegal must ensure that confidentiality is maintained both during the destruction process and the disposal. Destruction of Documents and Information When destroying a file, a paralegal should ensure that all of the contents of the file are destroyed.

This includes both paper and electronic documents and electronic information contained in the electronic document such as metadata.

This will assist a paralegal to counter allegations that a file was destroyed indiscriminately. Protect yourself. Introduction One of the challenges for paralegal firms is how to deal with the increasing volume of retained records such as closed client files and other administrative records. Reasons for File Retention There are a number of reasons why paralegals retain client files for a period of time or sometimes indefinitely after completion of the client matter.

Defend Against Claims and Allegations of Misconduct One of the key reasons paralegals retain files is to respond to negligence or other claims made against them. Legal Requirements A paralegal may choose to retain client documents in a file to assist the client to meet statutory obligations. Comply With Regulatory Requirements By-Law 9 made pursuant to the Law Society Act r equires paralegals to maintain specific books or records as part of their law office accounting system.