Record retention requirements under Rev. Proc. 98-25.

• Position: IRS Revenue Procedure 98-25 concerning automatic data processing systems

June 18, 1999

On June 18, 1999, Tax Executives Institute submitted the following comments to the Internal Revenue Service on Revenue Procedure 98-25, which relates to record retention requirements under section 6001 of the Internal Revenue Code where all or part of the taxpayer's financial or accounting records are maintained within an automatic data processing (ADP) system. The comments were prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Stephen W. Boocock of Allegheny Teledyne, Inc., and represents the work of an ad hoc working group chaired by Yasmin R. Seyal of Aerojet General Corporation, a vice chair of the committee. The following individuals also contributed to the Institute's comments, Barbara Barton of EDS Corporation, Robert J. Evans of MCI Worldcom, Sheldon A. Kimel of Brunswick Corporation; and Daniel T. Piekarczyk of Frontier Corp.

On March 16, 1998, the Internal Revenue Service (IRS) issued Revenue Procedure 98-25, 1998-11 I.R.B. 7, prescribing the basic record retention requirements under section 6001 of the Internal Revenue Code where all or part of the taxpayer's financial or accounting records are maintained within an automatic data processing (ADP) system. The revenue procedure updates and supersedes Rev. Proc. 91-59, 1991-2 C.B. 841.

Background

Tax Executives Institute is the preeminent association of business tax executives in North America. Our more than 5,000 members represent 2,800 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by Rev. Proc. 98-25. Indeed, TEI has had a long involvement in the development and refinement of the IRS's record-retention rules in respect of machine-sensible records. For example, TEI representatives met with IRS officials during the development of Rev. Proc. 86-19, 1986-1 C.B. 558, as well as its successor, Rev. Proc. 91-59. Moreover, after Rev. Proc. 91-59 was issued, TEI representatives devoted a substantial amount of time to meetings with IRS officials to develop a revised draft of a procedure addressing IRS record-retention requirements. The goal was to develop a procedure that clarified a number of technical and procedural issues under the procedure and to provide a better balance between taxpayer and IRS interests in respect of the heavy administrative and compliance requirements for machine-sensible or electronic records.(1) In short, the redrafted procedure was intended to conform to the views articulated by IRS representatives concerning the procedure's intent: to empower taxpayers to decide which records to retain rather than to impose a series of arbitrary, rigid, and burdensome requirements.

Hence, we commend the IRS for issuing Rev. Proc. 98-25 to update the guidance in respect of machine-sensible records. The procedure relaxes some of Rev. Proc. 91-59's more restrictive features(2) and addresses new developments in ADP systems. Nonetheless, Rev. Proc. 98-25 fails to discuss important issues that should be addressed and, regrettably, retains some stringent requirements from Rev. Proc. 91-59 that are unnecessary to safeguard the IRS's access to books and records under section 6001. Equally important, we do not believe this revenue procedure adequately reflects the IRS's new Mission Statement to

provide service "by helping [taxpayers] understand and meet their responsibilities and by applying the tax law with integrity and fairness to all." To advance the goal of providing taxpayers with quality service, we believe the revenue procedure should be revised. TEI's specific recommendations follow.

Issue Revenue Procedures Affecting Records Retention Every Other Year

The momentum of technological change affecting system software, hardware, and other record-retention technologies and the increasingly competitive environment in which most businesses operate challenges taxpayers to run harder and faster just to keep pace. Indeed, two or more generations of some technologies have been spawned in the nearly six years since TEI submitted its proposed revision of Rev. Proc. 91-59 in late 1993. In addition, IRS computer audit specialists (CAS), whom the Chief Counsel's Office consults in respect of ADP system record-retention matters, are only now undertaking detailed examinations of the sophisticated Database Management Software (DBMS) systems and Electronic Data Interchange (EDI) technology that many taxpayers implemented or expanded substantially during the 1990s. Indeed, ADP systems and DBMS software, which the procedure addresses, have generally been replaced by even more comprehensive and integrated enterprise resource planning (ERP) software and hardware systems. Hence, the IRS guidance process continually lags behind the development and implementation of efficient and effective record-retention technologies.

The lag in guidance on ADP systems frustrates taxpayers and the IRS alike in their mutual desire to promote an efficient examination process. To address this frustration, we recommend that the IRS consider updating this procedure more frequently than once every six to eight years. Effective and timely guidance on ADP systems is crucial to ensure efficient taxpayer record- retention practices, to minimize taxpayer burdens, and to safeguard IRS access to records. Without timely guidance on new technologies, taxpayers will remain uncertain about their record-retention obligations and, hence, may retain multiple information systems and redundant records thereby substantially increasing their record-keeping costs and diminishing the efficiencies and economies otherwise enabled by the new technology. Alternatively, some taxpayers may inadvertently discard records or change their systems thereby hindering the IRS's access to information necessary to conduct its examinations. Hence, TEI recommends that the IRS adopt a goal of issuing a revised revenue procedure every other year that addresses ADP systems and electronic record retention requirements. In addition, we recommend that the guidance on imaging systems and other technologies (Rev. Proc. 97-22, 1997-1 C.B. 652) be considered contemporaneously with, or even be incorporated into, the guidance on ADP systems so that the entire spectrum of requirements for electronic record storage and retrieval is addressed comprehensively. Such an approach would serve both taxpayers and the IRS by providing timely guidance on the most effective utilization of technology for tax support.

Establish a Liaison Group To Address Electronic Record Retention Rules

In addition to issuing more frequent updates on electronic record retention guidance, the IRS should develop a process through which taxpayers can routinely provide input about both the technologies and the IRS guidance affecting taxpayer record-keeping procedures and practices. Specifically, the IRS should consider establishing a liaison committee or working group to meet periodically, say, every six months, to identify issues and alternative solutions for updated successor guidance to Rev. Proc. 98-25. For example, the IRS could reestablish the IRS-TEI working group on electronic record retention though the group's membership should likely be expanded.(3) The 1991-1993 collaborative effort between the IRS and TEI produced a workable -- and, in our view, balanced -- document. (We believe the IRS National Office and field personnel who participated would agree.) That exercise was productive because it afforded taxpayers and the IRS a nonadversarial setting in which to develop the trust necessary to work cooperatively. While disagreements over particular...