ERP systems and record retention.

• Author: Smith, Annette B.
• Position: Enterprise resource planning

The enterprise resource planning (ERP) revolution has brought about sweeping changes for businesses worldwide. ERP systems capture and manage efficiently more information than some ever thought possible, and the ability to access this data has changed the way businesses make decisions. However, while these systems capture information at an amazing rate, many companies do not have a means of maintaining access to the data for as long as it takes the IRS to audit the applicable tax years.

IRS Guidance

Early guidance. As early as 1971, the Service addressed record-automation issues. Rev. Rul. 71-20 held that punched cards, magnetic tapes, disks and other machine-sensible data media used for recording, consolidating and summarizing accounting transactions and records in a taxpayer's automatic data processing (ADP) system were records within the meaning of Sec. 6001 and Regs. Sec. 1.6001-1, and had to be retained as long as the contents may become material in the administration of any internal revenue law.

Rev. Proc. 91-59. This addressed all types of ADP systems, including microcomputer systems, data base management systems (DBMSs), and electronic data interchange (EDI) systems. Rev. Proc. 91-59 gave district directors authority to require smaller taxpayers to retain machine-sensible records, and to enter into record retention limitation agreements (RRLAs) with taxpayers.

Under Rev. Proc. 91-59, records retained should be in a retrievable format that provides the information necessary to determine correct tax liability. The taxpayer must ensure that the details and the source documents underlying any summary accounting data can be easily identified and made available to the IRS on request. A materiality standard for machine-sensible records, applicable at least until the expiration of the statute of limitations (including extensions) for each tax year, was established. Rev. Proc. 91-59 also states that in certain situations, some records (e.g., those pertaining to fixed assets, losses incurred under Sec. 832(b)(5) and LIFO inventories) should be kept for a longer period.

Rev. Proc. 91-59 provided further that use of a DBMS necessitates implementing procedures to ensure that appropriate records and documentation are retained. A taxpayer would meet this requirement if a sequential file exists and contains the detail necessary to identify the underlying source documents.

The Service also requires taxpayers using EDI to retain machine-sensible...