Electronic record retention requirements systems.

• Author: Ely, Mark H.
• Position: Tax data

Editor's note: Mr. Ely is former chair of the AICPA Relations with the IRS Committee. Ms. Totsch, Ms. Butler and Mr. Black are committee members.

The IRS objective under the Internal Revenue Service Restructuring and Reform Act of 1998 is to have 80% of all returns filed electronically by 2007. As a result, an effort is being made to increase dramatically the number of electronically filed returns. This has raised questions about the retention of electronic tax data for individuals as well as for businesses. With the magnitude of transaction detail created by a corporation in the normal course of business, electronic retention of such records becomes absolutely crucial. Further, as companies turn increasingly to Internet-brokered transactions and a paperless environment, if they do not retain detailed records electronically, backup information will not be available to explain or verify transactions.

Retention Requirements

The recordkeeping requirements of Sec. 6001 apply to all taxpayers (including businesses), regardless of whether returns are filed electronically. Under Regs. Sec. 1.6001-1(a), taxpayers must keep all books and records (including inventory) sufficient to document the income, deductions, credits and other items included in a tax return. Under Regs. Sec. 1.6001-1 (e), taxpayers must retain books and records as long as the contents might become material to the administration of any internal revenue law.

Rev. Proc. 98-25 amplifies Sec. 6001 by giving taxpayers comprehensive guidance on requirements for keeping electronic tax records and providing the Service access to them. The procedure applies not only to electronically maintained income tax records, but also to excise, employment and estate and gift tax records, as well as tax records for employee benefit plans and exempt organizations. Citing Regs. Sec. 1.6001-1(e), Rev. Proc. 98-25 requires taxpayers to retain electronic or machine-sensible records used to record the business activities of a venture. Such materiality would continue at least until the end of the statutory period of limitations (including extensions) for each tax year. When considering a net operating loss carryforward (up to 20 years) or fixed-asset information until its disposal or full depreciation (up to 40 years for certain real property), the period for some data retention goes well beyond the basic three-year statute of limitations for a standard tax return.

Rev. Proc. 98-25 provides that...