Record retention under rev. proc. 91-59: a checklist approach.

In November 1991, the Internal Revenue Service issued Rev. Proc. 91-59, 1991-2 C.B. 841, to update its guidelines on record retention, effective for tax years beginning in 1992. The purpose of this article is to summarize the principal provisions of the new revenue procedure and to set forth a checklist for a prototypical corporation to document its compliance with the new guidelines.

Background

Section 6001 of the Internal Revenue Code requires taxpayers to maintain books and records. The tax regulations explain that taxpayers must keep permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown in the taxpayer's returns. Rev. Rul. 71-20, 1971-1 C.B. 392, states that machinesensible records are records that must be retained for tax purposes.

Rev. Proc. 86-19, 1986-1 C.B. 558, specified basic requirements intended to ensure that all machine-sensible records generated by a taxpayer's Automated Data Processing (ADP) system would be retained as long as they are material to the determination of tax liability. (Materiality is not specifically defined.) This continues to be the focus of the updated guidelines. For many companies, this typically would be at least seven years to allow for completion of all IRS and state audits and resolution of any unagreed issues through administrative appeals or otherwise.

In recognition of technological advances, the IRS updated and expanded its record retention guidelines pertaining to the retention of computer records. Rev. Proc. 9159 re-emphasizes the need to address a company's entire record retention policy to ensure that records are properly retained.

Overview

Rev. Proc. 91-59 specifies the basic requirements that the IRS considers essential when a taxpayer's records are maintained within an ADP system. These guidelines are incorporated into the checklist. Specifically, the guidelines clarify how machine-sensible records should be documented, stored, tested and presented to the IRS at the start of an audit. Finally, IRS access to the taxpayer's computer equipment for processing the retained information and the need for the cooperation and assistance of the taxpayer's data processing personnel is addressed. Direct on-line access is not required, although computer resources must be provided.

The detail of machine-sensible records should be retained and reconciled from the computer system to the consolidated books and to the tax return. The responsibility to retain hardcopy records that are created or received in the ordinary course of business generally is not changed by these guidelines. Hard-copy records may be retained in microfiche or microfilm format in accordance with the requirements outlined in Rev. Proc. 8146, 1986-2 C.B. 621. Optical or digital storage is not yet authorized.

The guidelines pertain to all matters under IRS jurisdiction, including income, excise and employment taxes, as well as employee plans and exempt organizations. Rev. Proc. 91-59 also is applicable to machine-sensible records generated by a controlled foreign corporation. Penalties may be imposed for failure to comply with the provisions of Rev. Proc. 91-59.

The IRS has the authority to enter into or revoke a record retention limitation agreement to modify or waive all or any of the specific requirements in Rev. Proc. 91-59. Taxpayers remain subject to all requirements that are not specifically modified or waived.

Checklist

This following Record Retention Checklist has been developed for use in documenting a company's compliance with updated IRS record retention guidelines. References are to sections of Rev. Proc. 91-59.

Record Retention under Rev. Proc. 91-59: A Checklist Approach

A. Current Status

1. The company's current record retention agreement dated MM/DD/YY has been reviewed.

2. The company is in compliance with the MM/DD/YY record retention agreement.

B. Machine-Sensible Records (section 5.01)

1. All records material to the administration of the tax law are retained.

2. The retained records are in retrievable format.

3. Details and source documents underlying any summary accounting data may

be easily identified and made available upon request.

C. ADP Portion of Accounting System ((section) 5.02)

1. Documentation that provides a complete description, including a description of

all subsystems and files, is retained and will be made available upon request.

2. Statements and illustrations on the scope of operations are sufficiently detailed to indicate:

a. the application being performed;

b. the procedures employed in each application;

c. the controls used to ensure accurate and reliable processing; and

d. the controls used to prevent unauthorized addition, alteration, or deletion of retained records.

D. Specific Documentation ((section) 5.03)

1. The following specific documentation for all retained files is kept:

a. record formats, including the meaning of all "codes";

b. flow charts for a system and a program;

c. label descriptions;

d. source program listings of programs that created the retained files;

e. detailed charts of accounts;

f. evidence of periodic checks for the retained records that are prescribed;

in Section I of this Checklist; and

g. evidence that the retained records reconcile to the books and the tax return.

2. The reconciliation in Section D.l.g above establishes the relationship between

the total of the amounts in the retained records by account to the account totals in the books and to the tax return.

E. Changes to ADP System ((section) 5.04)

1. Any change which affects the accounting system and/or subsystems,

together with its effective date, is documented in order to preserve an

accurate chronological record.

2. The documentation includes any changes to software or systems and any

changes to the formats of files.

F. Other Documentation ((section) 5.05)

Note: The IRS may require that any other evidence (e.g., internal audit reports) that pertains to the authenticity and integrity of the records be furni shed.

G. Machine-Sensible Record Retention ((section) 5.06)

1. Records are retained until their contents are no longer material to the administration of the tax law.

2. Note: At a minimum, this materiality continues until the expiration of the statute

of limitations, including extensions, for each year.

3. In certain circumstances, such as for fixed assets and LIFO inventories, records are kept for a period of time longer than the expiration of the statute of limitations, including extensions.

H. Identification and Storage ((section) 5.07)

1. All machine-sensible records that must be retained are clearly labeled and stored in a secure environment.

2. Note: Supplemental labels should be used and affixed to each tape reel, cartridge, disk pack, diskette, or other device being retained.

3. Note: A retention date should be written on the internal label.

4. Note: Back-up copies of records retained for the IRS should be stored at an off-site location.

5. Note: The IRS recommends that taxpayers refer to the National Archives and Record Administration's (NABA) standards for additional guidance on the maintenance and storage of electronic records.

I. Periodic Checks ((section) 5.08)

1. Periodic checks are made on all records retained for the IRS.

2. Note: The IRS recommends using the NARA standard for making periodic checks of retained machine-sensible records. In general, this standard requires a recordkeeper to annually select and test a random sample of all reels of magnetic tape to identify any loss of data, and to discover and correct the causes of data loss.

J. Lost or Damaged Records ((sections) 5.09, 5.10)

1. If any machine-sensible records required to be retained are lost, destroyed, damaged, or found to be incomplete or materially inaccurate, this will be reported to the IRS and the records will be recreated within a reasonable period of time.

2. Note: Although the NARA sampling standard referred to in Section I

of this Checklist is specifically for magnetic computer tape, the/RS recommends that all retained machine-sensible media be randomly sampled and test ed as described by NARA. A taxpayer whose data maintenance practices conform with the NARA standards and who loses only a portion of the data from a particular storage unit generally will not be subject to penalties. The taxpayer remains responsible, however, for substantiating the information on its return.

K. Processing at Time of Audit ((section) 5.11)

1. The retained records can be processed at the time of an IRS audit.

2. Processing includes the ability to print a hard copy of any record.

3. When the records become incompatible with a replacement system, pre-existing records will be converted to a format compatible with the new system.

4. Any changes in the ability to process the retained records will be reported to the IRS.

L. Computer Resources ((section) 5.12)

1. At a time of audit, the IRS will be provided with computer resources (e.g., terminal access, computer time, personnel, etc.) that are necessary for the processing of the retained records.

2. Note: Failure to provide these resources will be a failure to maintain books and records.

M. Data Base Management Systems (DBMS) ((sections) 5.13, 5.14)

1. A sequential file exists and is available to the/RS.

2. The sequential file contains the detail necessary to identify the underlying source documents.

3. Note: The process to create a sequential file should be reviewed by the IRS prior to destruction of the DBMS records.

4. The following additional documentation pertaining to each DBMS is retained:

a. data base description (DBD);

b. record layout of each segment with respect to the fields in the segment;

c. systems control language;

d. program specification block (PSB); and

e. program communication block (PCB).

N. Electronic Data Interchange (EDI) ((section) 5.15)

1. Machine-sensible records, in combination with any other records (e.g., the underlying contracts, price lists, and price changes), contain all of the detailed information required to be retained.

2. The extent of the detail in the retained electronic and other records is equivalent to the level of detail contained in an acceptable paper record.

3. Note: For example, the retained records for an electronic invoice must

contain identification of the vendor by name, invoice date, product description, quantity purchased, price, etc. The taxpayer may capture this infor mation at any level within the accounting system provided the audit trail, authenticity and integrity of the retained records can be established.

O. Impact on Hardcopy Recordkeeping Requirements ((section) 6)

1. Note: The provisions of Rev. Proc. 91-59 generally do not relieve taxpayers of the responsibility to retain hardcopy records that are created or r eceived in the ordinary course of business as required by existing law and regulations. Hardcopy records may be retained in microfiche or microfilm format in accordance with the requirements outlined in Rev. Proc. 81-46. These records are not a substitute for the machine-sensible records required to be retained by

Rev. Proc. 91-59.

2. Note: Hardcopy records generated at the time of a transaction (e.g., credit card receipts) need not be retained if all the details relating to the tr ansaction are subsequently received by the taxpayer in an ED/transaction and are retained by t he taxpayer in accordance with Rev. Proc. 91-59.

3. Note: If hardcopy records are not produced or received in the ordinary course of transacting business (as may be the case when utilizing EDI technology or are not retained pursuant to item 2 above, hardcopy printouts of computerized records need not be created unless requested by the IRS.

4. Note: Computer printouts that are created for validation, control, or other temporary purpose need not be retained.

P. Penalties ((section) 7)

Note: Penalties may be assessed if machine-sensible records are not properly retained as required by Rev. Proc. 91-59.

Q. Effective Date ((section) 9)

Note: Rev. Proc. 91-59 is effective for taxable years beginning after December 31, 1991.

CPE/CLE Accreditation

Tax Executives Institute has historically endeavored to provide its members with excellent educational programs. In light of the minimum requirements for continuing professional education that state CPA and bar associations now impose, the design and conduct of TEI's conferences, seminars, and courses become even more important.

To assist TEl members in satisfying their CPE requirements, TEl has contacted accrediting agencies in all 50 states and the District of Columbia to request information about approval for sponsorship of continuing professional education programs, In addition, TEl has become a qualified sponsor of CPE programs in respect of IRS enrolled agents.

Boards of Accountancy. TEl is currently registered with the following Boards of Accountancy: Illinois (#158000651), Indiana (#CE92000119, Exp. 12/93), New Jersey (#160), New York (E90-253 (1/1/91-8/31/93)), Ohio (P0087), Pennsylvania (PX613L), and Texas (#3522). TEl is also registered with the National Association of State Boards of Accountancy (Sponsor No. 91-0011 6-92).

Continuing Legal Education. The Institute is registered in the following states as a sponsor of continuing legal education programs: California (Exp. 8/93), Georgia (1992 47th Annual Conference - 24.5 credit hours, 1.0 Ethincs credit), Kentucky (1992 42nd Midyear Conference - 26.5 credit hours; 1992 47th Annual Conference - 25.5 credit hours, 0 Ethics credit), Minnesota (1992 42nd Midyear Conference - 18.5 credit hours; 1992 47th Annual Conference - 16.75 credit hours), Missouri, Ohio (1992 42nd Midyear Conference 22.25 credit hours; 1992 47th Annual Conference - 21.0 credit hours; International Tax Course - 25.25 credit hours), Oklahoma (1992 42nci Midyear Conference - 26.5 credit hours; 1991 46th Annual Conference - 28.5 credit hours), South Carolina (1990 40th Midyear Conference - 22.5 hours; 1991 46th Annual Conference 10.58 MCLE hours, .92 Ethics credits).

Note. Several states, such as Wisconsin and Georgia, require the individual to submit conference materials directly to the CLE Board. TEl provides a continuing professional education form for each registrant at its conferences, courses, and seminars, which should be completed at the conclusion of the program and returned to the TEl Registration Desk for verification and signature. A copy of the form is retained and filed at

MARK A. SELLNER is Director of U.S. Taxes for Ecolab Inc. He is a member of Tax Executives Institute's Minnesota Chapter, where he will serve as 1993-1994 chair of the Federal Tax Committee. Mr. Sellner received his B.S. degree from the University of Illinois, his J.D. degree from the University of Minnesota, and his LL.M. (Taxation) degree from Georgetown University Law Center. He is a certified public accountant and an adjunct professor at the University of Minnesota's Master of Business Taxation program.