Nonprofit Document Retention

A common question asked within all organizations, but especially nonprofits, is: “How long do I have to keep each document?”

The answer varies for each organization, but the general recommendation is for an exempt organization to have a written document retention and destruction policy. Per the Internal Revenue Service (IRS) Form 990 instructions, “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.” While not required by the IRS, it’s highly encouraged as a good governance policy.

The policy should stipulate the length of time each specific type of document should be kept, as well as the destruction procedure. It should also include guidelines for the handling of electronic files, backup procedures, the process of archiving documents and regular checks to ensure the system is dependable.

Why is document retention important?

Organizations must maintain books and records to confirm their compliance with tax law. They should ensure they have a recordkeeping system that allows them to clearly show income and expenses incurred in the tax year, attributable to each program. Failure to do so may cause an organization to lose their tax-exempt status or for a public charity to be reclassified as a private foundation.

Furthermore, a public charity may not be able to accurately complete its tax returns and may be subject to penalties. Certain federal laws also impose criminal liability on organizations that destroy records with the intent of obstructing a federal investigation.

By adopting a document retention policy, consistent treatment of records throughout the organization is ensured, which may be especially helpful for organizations that rely heavily on volunteers. Having this policy in place also reflects well on the organization, as it promotes transparency.

What records should be kept?

The IRS does not provide an exhaustive list of documents that should be retained. As such, the recommendations listed below are general guidelines for documents that should be retained permanently. Each organization should do their due diligence, learn their state’s requirements, modify their policy accordingly and adhere to it.

Records that should be retained permanently can include, but are not limited to, the following:

  1. IRS Form 1023 (application for exempt status)
  2. IRS determination letter recognizing tax exempt-status
  3. Organizational documents such as
    • Articles of Incorporation
    • Bylaws
    • Minutes of organizational meetings
    • Any legal changes/amendments to the organization
  4. Independent audit reports
  5. Tax returns, including postal service or electronic filing receipts (Note: Tax returns may be audited by the IRS for up to three years after they’re filed, so it’s advisable for an organization to keep documents that support the amounts reported)
  6. Annual financial statements

The beginning of a new year is a great time to revisit and revise your organization’s policy and discuss any necessary changes. The experts at SST are equipped and available to help your nonprofit navigate its record retention process – contact us today to learn more.

Special thanks to SST Tax Senior Tania Cruz for providing the content for this post.