New opportunity for businesses to limit IRS recordkeeping.

• Author: Mort, Kathy

One side effect of the information technology revolution has been the need for businesses to manage the enormous increase in information generated. One key concern relates to retaining records no longer needed for day-to-day operations, but that could prove critical if past transactions must be reviewed at some time in the future.

For Federal tax purposes, Sec. 6001 provides that taxpayers must keep such records as the IRS prescribes. Rev. Rul. 71-20 establishes that all machine-sensible data are records within the meaning of Sec. 6001. Rev. Proc. 64-12 provided the first guidelines for taxpayers maintaining records in an automatic data processing (ADP) system; Rev. Procs. 86-19 and 91-59 revised these guidelines. Most recently, the Service issued Rev. Proc. 98-25; as expected, taxpayers and practitioners now are asking what the new procedure means.

Shift in IRS Approach

Rev. Proc. 98-25 presents taxpayers with new opportunities for reducing record retention costs, including the costs of providing a secure storage environment, creating backup copies and testing to confirm record integrity. While Record Retention Limitation Agreements (RRLAs) were referenced in Rev. Proc. 91-59, the new procedure provides, for the first time, that taxpayers may request them. According to IRS officials, the new procedure is intended to be more user-friendly. In addition to authorizing taxpayers to request RRLAs, Rev. Proc. 98-25 provides more specific examples of what records taxpayers should maintain.

From the taxpayer's perspective, however, Rev. Proc. 98-25 may not seem quite as friendly as the Service has suggested. It opens with a requirement that the taxpayer maintain all machine-sensible records that support and verify entries on the return and that are necessary to determine correct tax liability. Failure to comply could result in the imposition of applicable penalties, including the Sec. 6662(a) accuracy-related civil penalty and the Sec. 7203 willful failure criminal penalty. At the same time, the availability of RRLAs is an opportunity to limit the records that must be retained and the attendant costs of maintaining those records.

Over the years, the IRS has done an "about-face" as to its evaluation of a taxpayer's records. In the past, the Service would conduct evaluations of a taxpayer's records to determine exactly which records the taxpayer should maintain. In recent years, however, because of the explosive growth of ADP systems, the IRS found...