IRS proposes allowing imaging systems to replace paper records.

The Internal Revenue Service has proposed letting taxpayers use electronic imaging systems, such as computer diskette and CD-ROM, to comply with its recordkeeping requirements. Notice 96-6 is intended to significantly reduce recordkeeping burdens by allowing companies that comply with the proposal to destroy hard copy documents.

"Taxpayers will soon be able to throw out a lot of paper records," said Patricia Marshall, tax manager of Walpert, Smullian & Blumenthal in Baltimore, Maryland. "If the taxpayer is computer literate and the imaging systems are implemented in a foolproof fashion, then it is conceivable that a room full of paper documents could be stored on a small shelf of CDs."

The proposal pertains to all books and records kept in compliance with Internal Revenue Code section 6001 for all matters under the jurisdiction of the IRS including income, excise, employment and estate and gift taxes, as well as employee plans and exempt organizations. The proposal lists the operational requirements imaging systems would have to meet to qualify as books and records under IRS code, although there are no technical specifications for hardware or software. Among the proposed requirements, imaging systems must

* Create accurate and complete electronic images of hard copy documents.

* Index, store, preserve, retrieve and reproduce imaged documents.

* Include reasonable controls to ensure integrity, accuracy and reliability of the imaging system.

* Include a record of where, when, by whom and on what equipment the image was produced, including the hardware and software used.

* Include controls to prevent unauthorized alteration or deletion.

* Include an inspection and quality assurance program.

* Be able to legibly reproduce hard copy or maintain a high degree of legibility when displayed on a video terminal.

* Provide support for the taxpayer's books and records, such as a cross-reference system.

Taxpayers who use an imaging system must provide the IRS with technical support to help them locate, retrieve, read or reproduce any imaged document. Also, an IRS district director may periodically test the taxpayer's imaging systems. These tests would not constitute an official examination or inspection of the books and records, but taxpayers not in compliance with IRS requirements could be issued penalties for inadequate records.

"This ruling is very favorable to the taxpayer because it does not require an initial application process," said Marshall. She said before her clients first used tape and microfilm storage systems, an IRS agent would have to visit the company and do a systems audit. "Under this proposal I can tell my clients that as long as they comply with the requirements they can discard their hard copy records. Properly indexed imaging systems also should make it easier for the agents who will sit in front of a PC and retrieve anything they want."

Marshall said the proposal would not only help her clients, but it would help software companies that market imaging systems. "These imaging systems are very expensive, and most of my clients were not willing to make the investment until they were certain they could throw their hard copy away," said Marshall.

For more information on the proposal, contact Celia Gabrysh of the IRS Office of the Assistant Chief Counsel by calling [phone].