Electronic storage of records.

• Author: Everidge, Kathryn L.

Editor's note: Mr. Ely chairs the AICPA Tax Division's Tax Practice & Procedures Committee. Ms. Everidge, Mr. Johnson, Mr. Olson and Mr. Lerman are members of the committee.

Electronic Storage of Records

In Rev. Proc. 98-25, the IRS released requirements it considers essential for taxpayers who maintain tax records electronically. These requirements, which modify and supersede those in Rev. Proc. 91-59, are effective for machine-sensible records for tax years after 1997. Record retention issues are growing in importance in light of the new "enterprise-wide" accounting systems (e.g., SAP, Oracle, etc.) that many are installing. Failure to comply with these requirements could result in the imposition of penalties.

Overview

Sec. 6001 requires every person liable for tax to keep adequate books and records. Generally, all Sec. 6001 requirements that apply to hardcopy books and records apply as well to machine-sensible books and records (i.e., data in an electronic format intended for use by a computer) and records maintained within an automatic data processing (ADP) system. An ADP system includes (but is not limited to) a mainfi2me, stand-alone or networked microcomputer system, data base management system, and a system that uses or incorporates tectronic data interchange or an electronic storage system. This revenue procedure does not relieve taxpayers of their responsibility to retain hardcopy records that are created or received in the ordinary course of business as required by existing law and regulations. (Rev. Proc. 97-22 prescribes specific rules for electronic storage systems (e.g., optical imaging).)

Who Must Comply

1. Taxpayers with assets of $10 million or more at the end of their tax year.

2. Taxpayers with assets of less than $10 million at the end of their tax year if:

   * All or part of the information required by Sec. 6001 is not in the taxpayer's hardcopy books and records, but is available in machine-sensible records;

   * Machine-sensible records are used for computations that cannot be reasonably verified or recomputed without using a computer (e.g., LIFO inventories); or

   * The taxpayer is notified by the district director that machine-sensible records must be retained to meet Sec. 6001 requirements.

3. A controlled foreign corporation, a domestic corporation that is 25% foreign-owned or a foreign corporation engaged in a trade or business in the U.S. at any time during a tax year that maintains machine-sensible records within an ADP...