New revenue procedure outlines electronic record retention rules and allows for destruction of originals.

Taxpayers implementing electronic storage systems that meet the requirements of Rev. Proc. 97-22 will be permitted to destroy original hard copy books and records and delete original computerized records.

Sec. 6001 requires a taxpayer to keep records, render statements and make returns sufficient to show whether or not that person is liable for tax. Virtually all taxpayers are required to keep records sufficient to establish the amount of gross income, deductions, credits or any other relevant matters concerning their tax liability. The records required under this section must be kept available at all times for inspection by authorized IRS personnel (Regs. Sec. 1.6001 (e)).

In Rev. Proc. 97-22, issued Mar. 13, 1997, the Service provides guidance to taxpayers who maintain books and records by using an electronic storage system that either images their hard copy (paper) books and records, or transfers their books and records to an electronic storage media (such as an optical disk). Taxpayers who follow the provisions of the revenue procedure will be in compliance with the recordkeeping requirements of Sec. 6001.

Rev. Proc. 97-22 applies to taxpayers who maintain books and records using an "electronic storage system," defined as "a system to prepare, record, transfer, index, store, preserve, retrieve, and reproduce records by either: 1. electronically imaging hard copy documents to an electronic storage media; or 2. transferring computerized books and records to an electronic storage media using a technique such as `COLD' (computer output to laser disk), which allows books and records to be viewed or reproduced without the use of the original program."

The procedure's requirements apply to income, excise, employment, and estate and gift taxes, as well as employer plans and exempt organizations. The guidance consists of various requirements that must be met for electronic storage systems to comply with Sec. 6001. The general requirements are that an electronic storage system must ensure an accurate and complete transfer of the hard copy or computerized books and records to an electronic storage media, and the system must also index, store, preserve, retrieve and reproduce the electronically stored books and records.

Ensuring Accuracy

The revenue procedure delineates several attributes the system must possess to ensure accurate and complete transfer, including a requirement that all books and records reproduced by the electronic storage system exhibit a high degree of legibility and readability when displayed on a video display terminal and reproduced in hard copy. In addition, the information maintained in the electronic storage system must be cross-referenced so that there is an audit trail between the general ledger and the source documents.

All information, equipment and personnel necessary to enable the IRS to access the stored documents must be maintained and made available to the Service on request.

Indexing System

The revenue procedure defines an adequate indexing system as one that permits the identification and retrieval for viewing or reproducing of relevant books and records maintained in the electronic storage system. An example of this would be a system that assigns a unique ID number to each electronically stored document and maintains a separate database that contains descriptions of all electronically stored books and records with their ID numbers.

The indexing requirement may be satisfied if the system is functionally comparable to a reasonable hard copy filing system.

Other Provisions

[ ] The IRS District Director may periodically initiate tests of a taxpayer's electronic storage system, but these are not considered to be examinations of books and records in an audit sense. [ ] If the taxpayer's electronic storage system fails the requirements of Rev. Proc. 97-22 (and, therefore, Sec. 6001), penalties will not apply if the taxpayer maintains its original books and records or maintains its books and records in micrographic form in conformity with Rev. Proc. 81-46.

Final Caveat 

Taxpayers whose electronic storage systems fail the requirements of the revenue procedure, and therefore have inadequate records under Regs. Sec. 1.6001-1(d), may be subject to applicable penalties, including the Sec. 6662(a) accuracy-related civil penalty and Sec. 7203 willful failure criminal penalty.