FILES, LEFT UNCHECKED, will multiply like locusts and overrun your entire office. The file room grows, while the remaining habitable space dwindles.

Unfortunately, there is no simple solution to the problem. "The safest records-retention policy is to keep all files permanently," according to Wendy F. Inge, director of risk management for the American Lawyers Insurance Reciprocal, the Bar Association's endorsed professional liability insurance carrier. "However, if the firm cannot do so, it should determine a retention schedule for file types by nature of work, the potential for further legal action and the length of applicable malpractice statute of limitations," she adds. "When establishing such retention time periods, remember that no one period will be correct for all files and that the nature of a particular file may dictate an exception to the firm's normal retention type."

Most experts recommend that law offices adopt a formal, comprehensive records-retention policy to be followed by attorneys and other office staff. By adopting a policy governing all records received by the office, firms can maintain client confidences and protect both the firm and its clients in the event of later litigation. A comprehensive records policy conserves space, and can help firms avoid wasting time and money. A formal policy enables firms to determine if files still exist without the need for exhaustive searches, and reduces the likelihood of other parties asserting the records were disposed of inappropriately.

The first item to be addressed in any file-storage policy should be the handling of work-in-progress. "The location and handling of active files should be addressed and there should be consideration of when files can be removed from the office and by whom," Inge said. Even with relatively small firms, a sign-out procedure can he helpful in locating files and preventing inappropriate use.

All materials in a client's files should remain confidential and be released only with written consent of the client and authorization of an attorney in the office. Attorneys should document releases of records. "A records-retention policy should recognize the fact that the firm retains its right to its work product, regardless of storage in the client's files, and the firm may properly retain or destroy theses documents without consultation with the client," says Inge. This issue may also be addressed in retainer agreements.

Upon closing a file or determining it to be inactive, a closing letter should be sent to the client confirming the termination of representation. The letter may include a notice that the client, within 30 days and at no charge, may obtain any papers not previously furnished. It may also advise that the firm will not keep the file permanently and that it may, without additional notice to the client, be destroyed. If files are not kept permanently, the policy should establish a procedure for the routine, confidential destruction of file documents that have passed the records-retention period.

Once a firm has made the decision not to retain some records, careful consideration must be given to determining which records to keep and for how long. A formal policy can save time, space and money and help ensure that, in a malpractice suit, the lack of records is not held against the firm.

Records held by law firms can generally be categorized as either "business records" or "legal representation records." Business records held by a law firm are similar to those held by businesses of other types and include items such as tax filings, payroll documentation and bank statements.

A primary factor in establishing a business records-retention policy is the ability of the Internal Revenue Service to audit records. "For practical purposes, this means that books and records must be kept for so long as there is a possibility that the taxpayer could file an amended return or claim for a refund, or the IRS could audit the return and assess additional tax," according to Jules Brayman, a Certified Public Accountant, Certified Fraud Examiner and Certified Valuation Analyst with Brayman, Houle, Keating & Albright, a Nashua-based accounting firm. "Generally, the IRS has three years after a return is filed to assess additional tax," noted Brayman. "However, if there is an omission of more than 25 percent of gross income from a return, additional tax can be assessed any time within six years of the filing date. There is no limitation on the assessment of additional taxes when no return is filed, or the return is false or fraudulent, or if there is a willful attempt to evade tax."

Brayman adds that "in reality, tax returns should be kept forever, if for no other reason than to provide proof that they were filed."

"In addition, the basic underlying financial records, such as annual financial statements and reconciliations to tax returns, should be kept indefinitely," he said.

While the most prudent policy is to keep all business records, or at least maintain copies of files on microfiche, several sources offer suggested retention timetables. In addition to several private publications, recommendations are available through the superintendent of documents at the U.S. Government Printing Office. The chart below provides the minimum retention periods, as recommended by the Brayman firm, for business records of various types.

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