TEI comments on LMSB record retention initiative: April 8, 2004.

• Position: Tax Executives Institute, Large and Midsize Business Division

On April 8, 2004, TEI President Raymond G. Rossi sent the following letter to John Askew, Program Manager, CAS, for the IRS's Large and Midsize Business Division, concerning a proposed LMSB initiative on record retention agreements. The letter follows up on a March 3, 2004, meeting with the IRS during which the proposal was discussed. Paul O'Connor of Millipore Corporation, Neil Traubenberg of Storage Technology Corporation, and Paul Marcy of Sara Lee Corporation contributed materially to the development of these comments.

On behalf of Tax Executives Institute, I am pleased to respond to your request for comments on LMSB's proposal for obtaining records limitation agreements in respect of machine-sensible files under Rev. Proc 98-25. This letter follows up on a March 3, 2004, meeting between LMSB and TEI representatives in which the proposal was first discussed. We understand that the IRS intends to issue the proposal in the form of Industry Director's Guidance.

Summary of Proposed Process

The proposed process will be limited to taxpayers in the Coordinated Industry Case (CIC) program in the LMSB and Tax Exempt/Government Entity Divisions. It will permit the taxpayer and IRS to agree jointly on the machine-sensible files needed by the examination team. Under the proposal, the taxpayer may request a records review shortly after the return is filed. An audit team--including specialists--will review the return and identify areas appropriate for consideration during an examination. The IRS computer audit specialist and the taxpayer will conduct a systems analysis to determine the files necessary to support these audit areas.

The taxpayer will agree to maintain records in respect of the identified transactions and issues. In addition, the taxpayer must maintain all records relating to tax shelters, items that should have been disclosed on the return, and any claims that may be filed. As we discussed in March, however, the definition of "tax shelter"--with its emphasis on substantially similar transactions--provides little guidance on what records should be maintained.

TEI commends LMSB for working with taxpayers to resolve the problems surrounding the amount of information required to be retained by the taxpayer. We believe that the proposal is a flexible one and represents a positive step in determining what data a taxpayer must retain. The proposal has the potential of reducing cycle time as well as burdensome recordkeeping requirements.

As...