Notice 96-10: draft revenue procedure on the use of imaging systems to satisfy the requirements of section 6001 of the Internal Revenue Code.

On April 11, 1996, Tax Executives Institute submitted the following comments to the Internal Revenue Service concerning Notice 96-10, which requested comments on a proposed revenue procedure relating to the use of digital imaging to satisfy the recordkeeping requirements of the Internal Revenue Code. The Institute's comments were prepared under the aegis of TEI's IRS Administrative Affairs Committee, whose chair is Robert L. Ashby of Northern Telecom Inc. In light of the importance of the subject, Mr. Ashby appointed Lonnie F. Nicol of the Aluminum Company of America to serve as chair of a working group to develop the Institute's response to Notice 96-10. In addition to Messrs. Ashby and Nicol, the following members of the Institute contributed to the development of TEI's comments: Clifford G. Fuerst, Jr., of Federated Department Stories, Inc., John A. Gurovich of US West, Inc., Sheldon A. Kimel of Brunswick Corp., Louis J. Manetti and Edmund J. Caulfield of Bell & Howell, Thomas J. Oldfield of Eastman Kodak Company, and Thomas B. Rogers of Apple Computer, Inc.

On January 24, 1996, the Internal Revenue Service issued Notice 96-10 requesting comments on a burden reduction initiative to permit the use of imaging systems for the retention of books and records. Notice 96-10 -- which was reprinted in the February 12 issue of the Internal Revenue Bulletin (1996-7 I.R.B. 47) -- sets forth a revenue procedure on digital imaging that addresses one means of complying with the requirements of section 6001 of the Internal Revenue Code, relating to the books and records required to support the items shown on tax returns.

Tax Executives Institute (TEI) commends the IRS in moving forward with this important step to ease taxpayers' recordkeeping burdens by permitting them to take advantage of technological improvements in the records storage and management area. To that end, we encourage the IRS to prepare and release a revised version of Revenue Procedure 91-59, which sets forth the basic requirements that the IRS considers to be essential in cases where a taxpayer's records are maintained within an Automatic Data Processing (ADP) system. (TEI has previously submitted detailed recommendations with respect to Revenue Procedure 91-59, and we shall be pleased to provide additional copies of those recommendations upon request.) We also recommend that the revision anticipate to the extent possible the next generation of records technology, including the integration of database information with information stored on imaging systems (which is sometimes referred to as COLD -- computer output to laser disk -- technology).

TEI is pleased to submit the following comments on the proposed guidance and we look forward to working with the IRS in maximizing the benefits of technological improvements and minimizing administrative burdens on taxpayers.

Background

TEI is the principal association of business tax executives in North America. The Institute's approximately 5,000 members represent more than 2,700 of the largest companies in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and the government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

TEI members are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed revenue procedure dealing with the retention of records using imaging systems.

General Comments

The stated goal of the proposed revenue procedure is to provide guidance to taxpayers on the use of imaging systems to maintain books and records. The draft procedure provides instruction on the operational capabilities of imaging systems and not the technical specifications for hardware and software.

Generally, TEI believes that the IRS's imaging system requirements should be no more onerous than the recordkeeping requirements for paper records. Indeed, digital imaging is merely an alternative system for storing records, and in our view taxpayers should not be subjected to significantly more burdensome requirements than those required for hard-copy records. We also believe that the particulars of a taxpayer's record storage system should be left to the taxpayer's discretion. Consequently, we applaud the inclusion of section 4.03 ("Recommended Practices"), which provides, as follows:

The implementation of record management practices is a business decision that is solely within the discretion of the taxpayer. Record management practices may include the labeling of documents, providing a secure storage environment, creating back-up copies, selecting an off-site storage location, retaining hard copies of illegible documents or documents that cannot be accurately or completely imaged or reproduced under the imaging system, and testing to confirm records integrity.

Throughout the draft procedure reference is made to "reasonable controls." We support this reasonable-control concept because it implies that taxpayers should exercise their judgment in setting standards for their systems and processes, rather than finding themselves hamstrung by one-size-fits-all pronouncements. We regret, however, that some of the draft's terms may be at once so expansive and ambiguous that the overall effect will be to detract from the procedure's promise. For example, section 4.01(3) provides that the taxpayers must retain written procedures that describe "in detail" the complete imaging system. We believe that the word "describe" is sufficient. Similarly, the draft procedure repeatedly refers to the need for written documentation, raising questions whether records produced on any system that is not supported by reams of written documentation will satisfy...