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Take note of stricter file-retention rules

January 17, 2007|Karen E. Klein | Special to The Times

Question: I'm closing a tax business and am unsure how to handle clients' tax returns, worksheets and financial records. Can I shred them?

Answer: For today's entrepreneurs -- accountants and bookkeepers in particular -- there is a ballooning list of documents that must be preserved for longer time periods than in previous years.

That's because of stricter file-retention legislation that was passed in the wake of accounting scandals at companies such as Enron Corp., said Kevin Roach, a partner in the Los Angeles office of PricewaterhouseCoopers.

"The Sarbanes-Oxley Act of 2002 imposes larger penalties -- for example, imprisonment for up to 20 years -- for document alteration or destruction," Roach said.

Under the new rules, accountants must maintain certain corporate audit records and work papers for five years. Any documents relating to an audit or review must be maintained for seven years. Violation of these policies carries potential fines and imprisonment.

Your safest bet is to talk to a business attorney about which documents you can shred and which you need to keep for several years. Here are some guidelines Roach offered:

Tax files with permanent or carry-forward information should be retained for as long as seven years, including the current year; tax files with planning or project information should be retained as long as seven years, again including the current year; tax returns and related work papers should be retained for 15 years, he said.


Self-insured workers' comp as an alternative

Q: I'm an independent drywall contractor and am concerned about the rising cost of workers' compensation insurance. What alternatives do I have?

A: Despite rate decreases over the last few years, California is still one of the most expensive states in the nation when it comes to workers' compensation costs. The cost, which can top $4 out of every $100 in payroll, is often particularly difficult for small businesses to afford.

In the past, only large companies had the financial and administrative resources to take advantage of alternatives -- such as self-insurance -- to standard coverage. But in recent years, smaller companies began pooling resources to form self-insured blocs that can buy coverage collectively, typically using a third-party administrator.

You may want to investigate self-insurance options through one of the handful of companies that provide these administrative services in California. Any provider you talk to should have approval to operate under the California Department of Industrial Relations.

Members of self-insured groups come from similar industries and share similar risk profiles, said Chet Walczyk, chief operating officer of Compensation Risk Managers of California in Irvine. CRM manages six self-insured workers' comp groups in California, representing 375 small businesses.

Each company considered for entry into one of CRM's groups undergoes an underwriting process, Walczyk said, that formulates a specific monetary contribution for that business and its particular risk profile. "This helps avoid price increases caused by adverse selection and exposure to unrelated industries," he said.

Because of the shared liability, Walczyk said self-insured group members were likely to self-police to prevent fraudulent claims and improve loss control.

More information about group self-insurance is available at and


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