Tax Record Retention Made Easy with AutoRecords for M-Files

IRS requires small businesses to retain tax documents for the period allowable to submit amended tax returns. Documents fall into a few different categories based on the circumstances, and each category will require the document to be retained for a different period. M-Files with AutoRecords can help you keep these documents straight and ensure that you retain documents in accordance with IRS guidelines.

Suppose that you are a small business with a handful of employees. You have tax documents spanning back several years, including those documents for your business’s income tax and those taxes withheld from your employees. After careful consideration of your tax situation, you’ve discovered that the IRS requires you to retain documents according to the following schedule:

• 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 employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Traditional folder-based document storage solutions are cumbersome and prone to errors during retention. Tax documents may be located in a complicated folder hierarchy, perhaps alongside non-tax documents and documents related to more than one tax year. How do you ensure that only those tax documents that are 2,3 or 4 years are deleted, and newer ones are retained?

M-Files, an industry leader in document management, uses a metadata-centric approach to store and organize your documents, bypassing the difficulties posed by traditional folder-oriented document storage solutions. Each document falls into a specific class, and each class of documents has a specific set of metadata properties. For our small business example, the metadata structure for our tax documents will look like this:

• Receipts Class
  • Date of Purchase Metadata Property
  • Total Price Metadata Property
• Employee Withholding Spreadsheet Class
  • Employees Metadata Property
  • Fiscal Quarter Metadata Property
• Form 941 – Quarterly Tax Withholding Return Class
  • Tax Year Metadata Property
  • Date Due Metadata Property
  • Date Paid Metadata Property
  • Retention Begin Date Metadata Property – Auto-Calculated to be the later of Date Due and Date Paid.
  • Employee Withholding Spreadsheets – internal documentation of withheld taxes from employee paychecks
• Form 1040 – Income Tax Return Class
  • Is Amended Metadata Property – Set to true if this form was ever amended by another Form 1040.
  • Date Filed
  • Original Date Filed Metadata Property – Same as Date Filed if Is Amended is false. Otherwise, set to value of the original 1040’s Date Filed value.
  • Date Paid Metadata Property
  • Retention Date Metadata Property – Auto-Calculated to be set to the later of Original Date Filed plus 3 years or Date Paid plus 2 years
  • Receipts Metadata Property

AutoRecords for M-Files leverages the metadata-centric approach of M-Files to automatically perform retention on documents according to flexible user-defined categories and schedules. These are the basic concepts of AutoRecords, and how each concept maps to our small business example.

• Policy – This is an AutoRecords configuration object that is used to specify which objects in M-Files will receive AutoRecords retention management. We will have two policies that apply two Retention Categories, essentially lining up with our two classes of tax documents.
• Form 941 Policy – This policy will apply the Form 941 Retention Category to all documents of class Form 941 and which will result in the referenced Employee Withholding Spreadsheets being deleted 4 years after date paid or date due. This will satisfy point 2 of the IRS’ retention guidelines.
• Form 1040 Policy - This policy will apply the Form 1040 Retention Category to all documents of that class, with one caveat: The Is Amended metadata property must be false. Recall that point 1 of the IRS guidelines requires that those documents used in amended returns should be retained for 3 years after the original file date, or 2 years after the tax was paid. If an amended tax return was submitted, we will ignore the original return (Is Amended set to true) and use the information stored on the amended return (Is Amended set to false) to perform retention actions on their related receipts. This will satisfy point 2 of the IRS guidelines.
• Retention Category – this is an AutoRecords configuration object that is applied to documents inside of M-Files by a Policy, and that specifies an Event Template that will be used to manage the lifecycle of all objects with the Retention Category. We will have two retention categories, one for Form 941 and another for Form 1040.
• Event Template - this is an AutoRecords configuration object that specifies what retention action we want to perform on documents, which metadata properties trigger the retention action, and a time period for AutoRecords to wait after the trigger condition is met before performing the action. The retention action we want to perform is deletion. For our trigger properties, we will choose for Form 1040 the Retention Date metadata property, and for Form 941 the Retention Begin Date metadata property. The period of time we will choose for Form 1040 will be 0 days, since the Retention Date already takes into account the retention period. For Form 941, we want a period of 4 years. Now, we don’t necessarily want to delete the tax returns themselves, but rather the documents that support them (Receipts and Employee Withholding Spreadsheets). For this, we will use a special trigger called an Indirect Trigger. In addition to the metadata property that triggers retention actions, we can also specify a relationship property that tells AutoRecords to perform retention on those documents that are referenced by a Form 1040 or Form 941. By specifying the Employee Withholding Spreadsheet and Receipts properties on our triggers, we tell AutoRecords to perform retention on those documents that are referenced by these metadata properties.
• Holds – this is an AutoRecords configuration object that tells AutoRecords to skip retention activities for either a specified or indeterminate time for documents of your choosing. If your business was ever audited by the IRS, you can place a hold on relevant documents to ensure that AutoRecords does not delete them until the audit is complete.

Once AutoRecords is configured with your user-defined actions, triggers, retention categories, and policies, the hard work is done. AutoRecords takes it from here, using your configuration to retain and delete your tax documents while maintaining regulatory compliance. Though this was intended to be a simple example, the retention schedule for amended tax returns can still be difficult to implement, and your own business case may be more difficult still. AutoRecords is flexible enough to handle nearly any retention schedule or complicated retention rules that your business may require. Reach out to TEAM IM today and let us show you how AutoRecords can meet even your most complicated document retention challenges.