Record retention rules of the electronic highway.

• Author: Crangle, Jan Steensen

With the cost of financial and accounting hardware and software dropping and computer capabilities and features improving, many businesses have found it more cost effective to replace old systems entirely. Other companies are converting hard copy records to an electronic medium in an effort to reduce storage space and associated costs, as well as to allow for faster searches for records and easier retrieval. In some cases, original transactions are electronic form, such as those involving electronic data inter-change (EDI).

This article alerts tax practitioners to die special record retention responsibities associated with computerized accounting and financial systems. It also highlights the concerns of taxing officials (whether local, state or Federal), including potential alteration of electronic records, access to the records, the ability to audit the system and access system documentation, and training of auditors to conduct examinations of electronic records.

Businesses Covered Under a

Records Retention Procedure

Many practioners assume that only large businesses need be concerned about electronic recordkeeping requirements. Although the IRS's recordkeeping requirements in Rev. Proc. 91-59 are specifically required in businesses with assets of more than $10 million, any business with computer tax records not available in hard copy must also comply. The requirements are also mandatory for businesses using computations that cannot be reasonably verified without a computer (e.g., lengthy LIFO inventory calculations).

Accountants should also not assume that their small business clients are not affected. Many companies using EDI are now requiring even their smallest vendors to use EDI; orders are actually refusing to do business with firms that do not use EDI for transmitting information.

IRS Recordkeeping Requirements

Sec. 6001, governing recordkeeping responsibilities, requires every person liable for any tax or its collection to keep prescribed records for so long as they are maternal in the administration of the tax law. Rev. Proc. 91-59 specifies the basic requirements considered essential when the taxpayers records are maintained within an automatic data processing (ADP) system, including microcmputers systems, data base management system and all systemss using EDI technology. The document emphasizes that the use of a service bureau, time-sharing service or value-added network does not relieve the taxpayer of record retention...