Use of imaging systems for retention of books and records.

Early this year, the IRS issued Notice, 96-10 as a proposed revenue procedure that would allow taxpayers to use imaging systems (as an alternative to hard copy) to satisfy the recordkeeping required for Federal tax purposes. The proposed revenue procedure would allow taxpayers an alternative to maintaining paper books and records to satisfy the recordkeeping required for Federal tax purposes.

Sec. 6001 and Regs. Sec. 1,6001-1(a) require taxpayers to retain such books and records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return...." Regs. Sec. 1.6001-1(e) further requires that any books and records required to be maintained by Sec. 6001 must be "retained so long as the contents thereof may become material in the administration of any internal revenue law."

The proposed revenue procedure sets forth the requirements that a taxpayers imaging system would have to meet to qualify as books and records within the meaning of Sec. 6001. Specifically, the imaging system must:

* Create accurate and electronic images of hard copy documents.

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

* Include reasonable controls to ensure the integrity, accuracy and reliability of the imaging system and to prevent the unauthorized creation of, addition to, alteration of or deterioration of any imaged document.

* Be maintained under detailed written procedures readily available to the Service on request.

* Provide support for and be cross-referenced to the taxpayers books and records.

* Create images and produce hard copies that exhibit a "high degree of legibility and readability."

The proposed procedure would also require taxpayers to retain imaged documents "until their contents are no longer material to the administration of the Internal Revenue laws" (Regs. Sec. 1.6001-1(e)). Taxpayers that use an imaging system must also provide the Service, either at the time of an audit or for periodic testing of the taxpayer's compliance with the revenue procedure, with the resources necessary for the IRS to promptly locate, retrieve, read and reproduce on paper any imaged document. The District Director's periodic testing of a taxpayers imaging system would not constitute an "examination," "investigation" or "inspection" of the taxpayers books and records within the meaning of Sec. 7605(b), and would not be a prior audit for purposes of Section 530 of the Revenue Act of 1978.

Under the proposed procedure, taxpayers who conform with all of these requirements would no longer have to maintain and store paper books and records. This could result in significant cost savings.