Record retention under rev. proc. 91-59: a checklist approach.

• Author: Sellner, Mark A.

In November 1991, the Internal Revenue Service issued Rev. Proc. 91-59, 1991-2 C.B. 841, to update its guidelines on record retention, effective for tax years beginning in 1992. The purpose of this article is to summarize the principal provisions of the new revenue procedure and to set forth a checklist for a prototypical corporation to document its compliance with the new guidelines.

Background

Section 6001 of the Internal Revenue Code requires taxpayers to maintain books and records. The tax regulations explain that taxpayers must keep permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown in the taxpayer's returns. Rev. Rul. 71-20, 1971-1 C.B. 392, states that machinesensible records are records that must be retained for tax purposes.

Rev. Proc. 86-19, 1986-1 C.B. 558, specified basic requirements intended to ensure that all machine-sensible records generated by a taxpayer's Automated Data Processing (ADP) system would be retained as long as they are material to the determination of tax liability. (Materiality is not specifically defined.) This continues to be the focus of the updated guidelines. For many companies, this typically would be at least seven years to allow for completion of all IRS and state audits and resolution of any unagreed issues through administrative appeals or otherwise.

In recognition of technological advances, the IRS updated and expanded its record retention guidelines pertaining to the retention of computer records. Rev. Proc. 9159 re-emphasizes the need to address a company's entire record retention policy to ensure that records are properly retained.

Overview

Rev. Proc. 91-59 specifies the basic requirements that the IRS considers essential when a taxpayer's records are maintained within an ADP system. These guidelines are incorporated into the checklist. Specifically, the guidelines clarify how machine-sensible records should be documented, stored, tested and presented to the IRS at the start of an audit. Finally, IRS access to the taxpayer's computer equipment for processing the retained information and the need for the cooperation and assistance of the taxpayer's data processing personnel is addressed. Direct on-line access is not required, although computer resources must be provided.

The detail of machine-sensible records should be retained and reconciled from the computer system to the consolidated books and to the tax return. The responsibility to retain hardcopy records that are created or received in the ordinary course of business generally is not changed by these guidelines. Hard-copy records may be retained in microfiche or microfilm format in accordance with the requirements outlined in Rev. Proc. 8146, 1986-2 C.B. 621. Optical or digital storage is not yet authorized.

The guidelines pertain to all matters under IRS jurisdiction, including income, excise and employment taxes, as well as employee plans and exempt organizations. Rev. Proc. 91-59 also is applicable to machine-sensible records generated by a controlled foreign corporation. Penalties may be imposed for failure to comply with the provisions of Rev. Proc. 91-59.

The IRS has the authority to enter into or revoke a record retention limitation agreement to modify or waive all or any of the specific requirements in Rev. Proc. 91-59. Taxpayers remain subject to all requirements that are not specifically modified or waived.

Checklist

This following Record Retention Checklist has been developed for use in documenting a company's compliance with updated IRS record retention guidelines. References are to sections of Rev. Proc. 91-59.

Record Retention under Rev. Proc. 91-59: A Checklist Approach

1. Current Status

   1. The company's current record retention agreement...