A New Australian Regulation for Electronic Tax Records.
Unlike U.S. laws, international laws have not contained detailed provisions regarding electronic tax records. However, the issuance of a new Draft Taxation Ruling by the Australian Taxation Office (ATO ATO Australian Taxation Office
ATO Ambito Territoriale Ottimale (Italy)
ATO Alpha Tau Omega
ATO Air Traffic Organization (FAA)
ATO Arab Towns Organization
ATO Air Tasking Order
ATO Assemble To Order ) changes this situation. This article reviews the main features of Australia's DTR (Data Terminal Ready) An RS-232 signal sent from the computer or terminal to the modem indicating that it is able to accept data. Contrast with DSR.
DTR - Data Terminal Ready 97/D4, Income Tax: Electronic Recordkeeping, and compares it to Revenue Procedure 98-25, its counterpart issued by the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. .
Background of DTR 97/D4
Tax authorities throughout the world want organizations to maintain records, regardless of form or media, that are true and accurate, legible leg·i·ble
1. Possible to read or decipher: legible handwriting.
2. Plainly discernible; apparent: legible weaknesses in character and disposition. , accessible, and retained for as long as they are needed for tax purposes. However, electronic records pose certain risks not generally encountered with manual, paper-based recordkeeping. In DTR 97/D4, the ATO notes that electronic tax records (i.e., those required to compute a corporation's tax liability and to justify that liability to the government during tax audits) are subject to:
* Inadvertent destruction or corruption as is any digital information
* Unauthorized tampering tampering The adulteration of a thing. See Drug tampering. , which may compromise their integrity as true and accurate records
* Obsolescence ob·so·les·cent
1. Being in the process of passing out of use or usefulness; becoming obsolete.
2. Biology Gradually disappearing; imperfectly or only slightly developed. of the operating systems Operating systems can be categorized by technology, ownership, licensing, working state, usage, and by many other characteristics. In practice, many of these groupings may overlap. used to process them, due to the constant upgrading or changing of computer systems over time
DTR 97/D4 sets forth provisions prescribing the characteristics of electronic recordkeeping systems required to make computerized accounting systems sufficient for tax purposes. The regulation covers electronic records in all common formats, including fixed and removable hard disks (storage) removable hard disk - A type of magnetic disk, or possibly magneto-optical disk which is not permanently attached to the disk drive (not a fixed disk) but which can be taken out and replaced, allowing many disks to be used in the same drive. , floppy diskettes, CD-ROM CD-ROM: see compact disc.
in full compact disc read-only memory
Type of computer storage medium that is read optically (e.g., by a laser). , optical disks, and magnetic tapes. The regulation also contains a separate section relating to relating to relate prep → concernant
relating to relate prep → bezüglich +gen, mit Bezug auf +acc tax records processed on Electronic Data Interchange See EDI.
(application, communications) electronic data interchange - (EDI) The exchange of standardised document forms between computer systems for business use. EDI is part of electronic commerce. (EDI (Electronic Data Interchange) The electronic communication of business transactions, such as orders, confirmations and invoices, between organizations. Third parties provide EDI services that enable organizations with different equipment to connect. ) systems, but it does not address the maintenance and retention of electronic records created from business transactions carried out through the Internet.
The general provisions of DTR 97/D4 pertaining per·tain
intr.v. per·tained, per·tain·ing, per·tains
1. To have reference; relate: evidence that pertains to the accident.
2. to the use of electronic recordkeeping systems for tax records are:
* Records processed and kept electronically must be in a form which ATO staff can access and understand in order to ascertain a company's tax liability.
* The information contained in a
record kept in a computerized accounting system, must be the same as would be contained in a manual accounting system.
* Businesses operating computerized accounting systems must have in place adequate controls to safeguard the security and integrity of the records processed and retained in such systems. These may include access controls, input and output controls, processing controls, and back-up controls. In any case, the level of controls must be sufficient to demonstrate that the records retained in the computer system are secure and accurate.
Electronic Document Imaging Systems
In promulgating DTR 97/D4, the ATO indicates that it will accept the use of electronic document imaging systems for tax records provided that the electronic copies are a "true and clear reproduction of the original paper records." However, the ruling provides that any tax records stored using this technology must be:
* Read only and must not in any way be altered or manipulated once inscribed in·scribe
tr.v. in·scribed, in·scrib·ing, in·scribes
a. To write, print, carve, or engrave (words or letters) on or in a surface.
b. To mark or engrave (a surface) with words or letters.
* Retained for the statutory period of five years
* Capable of being retrieved, read and printed upon request of the ATO staff
* Subject to adequate back-up control (i.e., a duplicate back-up copy of the stored records must be kept at all times at a safe location)
Where businesses elect to maintain computerized accounting systems for tax records, DTR 97/D4 requires that certain documents be retained to explain the system's basic aspects so that ATO officers can determine if the system does what it claims to do and whether the records processed in it are true and accurate. Systems documentation elements encompass:
* Operation of various system components
* Controls built into the system
* Data flow from input to output
* File organization and control details
* Record content and format details
* Program logic for computer programs developed in-house
* Audit trails or logs of records added, deleted, and amended which relate to the accounting system
Electronic Data Interchange
DTR 97/D4 defines electronic data interchange (EDI) as the transfer of data electronically from computer to computer by agreed message standards. The exchange of information can be document transfer only (i.e., a document is merely sent electronically to a receiver, like an invoice sent by mail) or by interactive mode (i.e., the document results from an actual exchange of information, like an interaction by telephone).
In the new tax ruling, ATO's position is that the general principles governing records processed and kept in an EDI environment are the same as those for a normal computerized accounting system. Businesses that operate in an EDI environment should have in place adequate controls (enumerated This term is often used in law as equivalent to mentioned specifically, designated, or expressly named or granted; as in speaking of enumerated governmental powers, items of property, or articles in a tariff schedule. above) to safeguard the security and integrity of EDI transactions. Further, users of EDI systems should ensure that controls are in place to prevent unauthorized access to their EDI network by the use of access passwords or some other form of authentication (1) Verifying the integrity of a transmitted message. See message integrity, e-mail authentication and MAC.
(2) Verifying the identity of a user logging into a network. (e.g., electronic signatures), together with a secure user profile. The profile defines the identities of trading partners, the transaction types that can be exchanged, the standards and versions used, and the direction of the exchange.
The profile would ordinarily be encrypted en·crypt
tr.v. en·crypt·ed, en·crypt·ing, en·crypts
1. To put into code or cipher.
2. Computer Science and secured against unlawful access by the use of user passwords, PIN numbers, or access keys. In addition, EDI messages should be protected against unauthorized reading by applying encryption The reversible transformation of data from the original (the plaintext) to a difficult-to-interpret format (the ciphertext) as a mechanism for protecting its confidentiality, integrity and sometimes its authenticity. Encryption uses an encryption algorithm and one or more encryption keys. techniques to the messages. Providing that these controls are in place, the ATO considers that the five-year retention requirement will apply equally in an EDI environment.
DTR 97/D4 requires retaining one copy of all original transmitted and received messages in their own interchanged image, as well as audit trails and logs of all EDI transactions. The audit trails allow a transaction to be traced forward to its ultimate destination and backward to its origin through relevant source transactions. Encrypted messages must permit encryption removal to allow authorized au·thor·ize
tr.v. au·thor·ized, au·thor·iz·ing, au·thor·iz·es
1. To grant authority or power to.
2. To give permission for; sanction: officers to understand the messages' contents.
Revenue Procedure 98-25
The U.S. counterpart to DTR 97/D4 is Revenue Procedure 98-25, first issued in 1991 and revised last year. The electronic recordkeeping "requirements" contained in 98-25 are actually in the form of procedures: as such they do not carry the force of law or regulation. Nevertheless, these procedures are significant as the official expression of federal intent regarding management of electronic tax documentation. Moreover, these procedures are binding on corporate taxpayers when companies enter into records retention agreements with the IRS.
Like DTR 97/D4, the main purpose of Revenue Procedure 98-25 is to ensure that corporate taxpayers retain, in usable form, all electronically maintained tax documentation for as long as the corporation's tax liability continues (i.e., until tax audits are complete). Audits for a given tax year and the process of adjudicating tax disputes resulting from those audits, can sometimes take five to 10 years (or even longer) to resolve. The life span of the computer systems on which tax documentation resides, however, can be considerably shorter than a corporation's tax liability. In fact, corporations often upgrade the hardware and software supporting their financial recordkeeping systems two to three times during that five- or 10-year period.
The key issue addressed by 98-25 is the same as in DTR 97/D4: the revenue authorities want to be certain that corporate taxpayers maintain their electronic tax documentation in a fully auditable form. More specifically, the IRS wants taxpayers to maintain computer systems for tax documentation that provide a complete audit trail, allowing all recorded financial transactions to be traced to their origin. This requires corporate taxpayers to retain computer software and other systems documentation for the full period of tax liability for a given tax year; in other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently , to preserve the software and other documentation of superseded systems for extended periods of time for possible use in tax audits.
To summarize the main provisions of Revenue Procedure 98-25:
* Electronic tax records must be retained "until their contents are no longer material to the administration of the [Internal Revenue] Code." Materiality MATERIALITY. That which is important; that which is not merely of form but of substance.
2. When a bill for discovery has been filed, for example, the defendant must answer every material fact which is charged in the bill, and the test in these cases seems to continues "until the expiration of the statute of limitations A type of federal or state law that restricts the time within which legal proceedings may be brought.
Statutes of limitations, which date back to early Roman Law, are a fundamental part of European and U.S. law. , including extensions, for each tax year."
* The retained records must be in a retrievable format that provides information necessary to determine correct tax liability.
* The requirements for migrating electronic tax documentation to new hardware and software environments state that records (for a given tax year) must be converted to a compatible format when the data processing data processing or information processing, operations (e.g., handling, merging, sorting, and computing) performed upon data in accordance with strictly defined procedures, such as recording and summarizing the financial transactions of a system that created them is replaced by a new system.
* The requirements for technical documentation of superseded computer systems stipulates that documentation describing the accounting system, including all subsystems and files that feed into the accounting system, shall be retained. Required systems documentation includes "record formats, flowcharts, label descriptions, source program listings, and charts of accounts.
* For tax documentation maintained on DBMS (DataBase Management System) Software that controls the organization, storage, retrieval, security and integrity of data in a database. It accepts requests from the application and instructs the operating system to transfer the appropriate data. systems, taxpayers must retain "sequential files containing the details necessary to identify the underlying source documents," as well as systems documentation sufficient to support audit requirements and demonstrate the integrity of the records.
The procedure's other provisions pertain to pertain to
verb relate to, concern, refer to, regard, be part of, belong to, apply to, bear on, befit, be relevant to, be appropriate to, appertain to protecting electronic tax documentation from loss due to disaster or other causes, and other measure designed to ensure the integrity of these records during their retention life.
Note that Revenue Procedure 98-25 pertains specifically to electronic tax documentation; it does not relieve the taxpayer of the responsibility to retain hard copy records which are or may be subject to tax audits.
Information managers of multinational companies having major business interests in both Australia and the United States should become thoroughly conversant CONVERSANT. One who is in the habit of being in a particular place, is said to be conversant there. Barnes, 162. with these issuances, discuss them with their tax managers, and work to ensure full compliance with them by implementing appropriate procedures and controls in all affected recordkeeping systems.
Comparison of Rules for Electronic Tax Records in Australian and United States
ISSUE DTR 97/D4 (AUSTRALIA) Maintenance of electronic tax records Yes in auditable form for period of tax liability Recognition of practical difficulties Yes in maintaining electronic records given the short service lives of computer systems Detailed requirements for systems Yes controls to ensure integrity and Preservation of systems documentation Yes Specific technologies addressed Yes; Electronic document imaging and electronic data interchange Integrity and auditability issues for Not addressed business transactions over the Internet Specific retention period 5 years ISSUE IRS REVENUE PROCEDURE 98-25 (UNITED STATES) Maintenance of electronic tax records Yes in auditable form for period of tax liability Recognition of practical difficulties Yes in maintaining electronic records given the short service lives of computer systems Detailed requirements for systems Yes controls to ensure integrity and Preservation of systems documentation Yes, includes provisions for keeping documentation on superceded systems. Specific technologies addressed No specific areas of technology per se Integrity and auditability issues for Not addressed business transactions over the Internet Specific retention period None specified
For additional readings concerning electronic tax records in an international context, see the following:
Stephens, David O. "Records Retention Provisions of International Tax Laws." Records Management Quarterly. October 1996.
--. "Electronic Recordkeeping Provisions in International Laws." Records Management Quarterly. April 1997.
Stephens, David O. and Wallace, Roderick C. Electronic Records Retention: An Introduction. 1997.
David O. Stephens, CRM (Customer Relationship Management) An integrated information system that is used to plan, schedule and control the presales and postsales activities in an organization. , CMC (Common Messaging Calls) A programming interface specified by the XAPIA as the standard messaging API for X.400 and other messaging systems. CMC is intended to provide a common API for applications that want to become mail enabled.
1. , is Vice President of the Records Management Consulting Noun 1. management consulting - a service industry that provides advice to those in charge of running a business
service industry - an industry that provides services rather than tangible objects Division at Zasio Enterprises Inc. He has been a consultant in the field of records management for more than 18 years. He is an accomplished author of books and articles about records management in the United States and abroad. The author may be reached at email@example.com.