IRS record retention rules and the computer age.

• Author: Tallyen, Jeffrey J.

Pursuant to Treasury regulations under Sec. 6001, taxpayers must retain books and records as long as the contents may become material to any matter under IRS jurisdiction. In today's technologically advanced business environment, questions arise over what records must be retained when a taxpayer is using technology such as automatic data processing lADP) systems or electronic data interchange (EDI).

It is important that taxpayers keep records to support income, deductions and credits, as shown on their filed returns. The Service may assess additional tax, and even civil and criminal penalties under Secs. 6662 and 7203, for failure to retain appropriate records. Clearly, records must be kept as long as the statute of limitations remains open for a particular year, however, tax determinations dependent on the basis of property and items such as NOL carrybacks and carryovers significantly increase required retention periods.

The IRS's principal guidance on machine-sensible records is found in Rev. Proc. 91-59. Generally, Rev. Proc. 91-59 applies to taxpayers with assets of $10 million or more. It also applies to taxpayers with assets of less than $10 million if(1) the books and records are only available in machine-sensible format, (2) machine-sensible records were used for complex computations (e.g., LIFO or Sec.263A) or (3) the taxpayer is notified by the Service that machine-sensible records must be retained.

Under Rev. Proc. 91-59, documentation of an accounting system, including all subsystems and files that feed into the system, must be retained and made available to the IRS on request. This includes punched cards, magnetic tapes, disks and other machine-sensible data used for recording, consolidating and summarizing accounting transactions and records within a taxpayer's ADP system. These records must be able to be reconciled with the taxpayer's books and tax return.

In addition, Rev. Proc. 91-59 sets forth specific procedures that the taxpayer must perform to insure the integrity of the system and the accessibility of the records. Also, the taxpayer must provide the Service with computer resources (e.g., terminal access, computer time and personnel) necessary to process the retained information; failure to do so will be considered a failure to maintain books and records. A taxpayer using an outside processing service or a value-added network is not relieved of Rev. Proc. 91-59 requirements.

Retention of ADP records or files does not...