Recordkeeping for electronic transactions.

• Author: Wright, Benjamin

Recordkeeping for Electronic Transactions

Business transactions are going paperless, but tax record retention guidelines haven't kept pace. They still contemplate the creation and storage of paper documentation. This article briefly reviews the tax issues raised by "paperless transactions."

Currently, between five to seven thousand corporations use electronic data interchange (EDI) to transmit purchase orders, invoices, and remittance advices between themselves. EDI is the computer-to-computer exchange of business data in a structured format. Especially popular in the automotive, retail, and health care industries, EDI is fast gaining importance in American commerce.

EDI is often used to communicate tax relevant information between independent firms. So the question arises how this information should be retained to satisfy tax auditors. Although the Internal Revenue Service has issued guidelines for the storage of tax information in some automated data processing (ADP) environments, their pertinence to the EDI record retention question is less than crystal clear.

Rev. Rul. 71-20, 1971-1 C.B. 392, calls for the retention of all electronic media (tapes and disks) that store tax-related data. Rev. Proc. 86-19, 1986-1 C.B. 558, generally requires the thorough documentation of ADP systems and the development of audit trails for the tracing of data through the successive stages of processing. These guidelines, however, are designed for computer accounting systems, not intercorporate transaction systems. They were written on the assumption that paper documents, such as invoices and vouchers, support the information in accounting systems. That assumption is important because paper documentation helps auditors verify information. Paper holds information in a stable unit over a long period of time, and it allows easy, visual inspection of information.

EDI and other electronic transaction technologies, such as electronic mail and electronic securities trading systems, invalidate the assumption. Consequently, companies that do business electronically -- not to mention IRS representatives -- have been puzzled over how electronic data should be retained.

Should the data be stored in a log exactly as it was communicated between companies? Or should it be re-formatted and stored in a database after communication? Should controls be placed on any of the data to ensure the information is not changed after origination? If so, how strong should the controls...