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TEI comments on LMSB record retention initiative: April 8, 2004.

On April 8, 2004, TEI President Raymond G. Rossi sent the following letter to John Askew, Program Manager, CAS, for the IRS's Large and Midsize Business Division, concerning a proposed LMSB initiative on record retention agreements. The letter follows up on a March 3, 2004, meeting with the IRS during which the proposal was discussed. Paul O'Connor of Millipore Corporation, Neil Traubenberg of Storage Technology Corporation, and Paul Marcy of Sara Lee Corporation contributed materially to the development of these comments.

On behalf of Tax Executives Institute, I am pleased to respond to your request for comments on LMSB's proposal for obtaining records limitation agreements in respect of machine-sensible files under Rev. Proc 98-25. This letter follows up on a March 3, 2004, meeting between LMSB and TEI representatives in which the proposal was first discussed. We understand that the IRS intends to issue the proposal in the form of Industry Director's Guidance.

Summary of Proposed Process

The proposed process will be limited to taxpayers in the Coordinated Industry Case (CIC) program in the LMSB and Tax Exempt/Government Entity Divisions. It will permit the taxpayer and IRS to agree jointly on the machine-sensible files needed by the examination team. Under the proposal, the taxpayer may request a records review shortly after the return is filed. An audit team--including specialists--will review the return and identify areas appropriate for consideration during an examination. The IRS computer audit specialist and the taxpayer will conduct a systems analysis to determine the files necessary to support these audit areas.

The taxpayer will agree to maintain records in respect of the identified transactions and issues. In addition, the taxpayer must maintain all records relating to tax shelters, items that should have been disclosed on the return, and any claims that may be filed. As we discussed in March, however, the definition of "tax shelter"--with its emphasis on substantially similar transactions--provides little guidance on what records should be maintained.

TEI commends LMSB for working with taxpayers to resolve the problems surrounding the amount of information required to be retained by the taxpayer. We believe that the proposal is a flexible one and represents a positive step in determining what data a taxpayer must retain. The proposal has the potential of reducing cycle time as well as burdensome recordkeeping requirements.

As the examination process moves closer and closer to the time of filing the return, many of the problems associated with records retention will be eliminated. Thus, the proposal effectively complements Commissioner Everson's currency initiative; both taxpayers and the government will benefit from the timely review of data and the limitation on records to be retained.

Additional Recommendations

1. Alternative Format. During our March 3 meeting, we discussed refining the proposal to permit taxpayers to use an alternative format (such as a flat file) for maintaining the records, thereby eliminating the need for the taxpayer to maintain the original software program with which the files were created. LMSB representatives expressed a willingness to consider this suggestion. TEI therefore recommends that the process section of the proposal be amended, as follows:</p> <pre> During current LMSB examinations or with the filing of a return, a taxpayer may request CAS involvement to assist in the preparation of

future audits. Specifically, CAS will work with the designated

examination team, if available, and the taxpayer to list the computerized accounting records that will be the primary focus of the audit, i.e., general ledgers, accounts payable, and fixed

assets. The taxpayer may store such data in a standardized format that will be easily accessible by the CAS regardless of the software the taxpayer is currently using, i.e., data could be stored in an annual sequential tape file. </pre> <p>The exceptions for records relating to tax shelters, claims, etc., could be broken out in a separate section labelled "Exceptions."

2. Additional Data. The examination team should also review whether the taxpayer's system accurately records transactions. If the team is satisfied, then the taxpayer should not be required to maintain all the fundamental detail that supports the data. For example, if the IRS wants to substantiate the cost of a taxpayer's product, it will determine that the system accurately records that cost. The taxpayer then will not be required to retain the cost of several thousand components that make up each product that the taxpayer sells.

3. Prospective Nature of Process. The proposal seemingly anticipates that the review of the taxpayer's files will be on an annual basis. Most data maintained by the taxpayer (such as general ledgers, accounts payable, and fixed assets) do not change materially from year to year. TEI recommends that the proposal clarify that the agreement may be applied on a prospective basis so long as there are no significant changes to the taxpayer's operations.

Next Steps

The establishment of a taxpayer-initiated process for obtaining record limitation agreements is laudable, but it does not obviate the need for more general guidance. Many CIC taxpayers use enterprise resource planning (ERP) systems such as those offered by Oracle, PeopleSoft, and SAP. In prior meetings, we have discussed the possibility of issuing model agreements for ERP users. TEI believes that issuance of a model agreement is worthwhile and suggests that LMSB consider forming a team to work with the ERP systems creators and taxpayers to identify the location of data and field name within the particular ERP system, which could be issued as additional Industry Director's Guidance. Taxpayers that follow the IRS's general guidance could qualify for safe harbor treatment in respect of the records required to be retained. Like the proposal under consideration, exceptions could be made for records relating to tax shelters, issues that should have been disclosed on the return, and any claims that may subsequently be filed. Taxpayers could still request a records review under the current LMSB proposal, but the review could be more limited since the general files would have already been identified.


TEI appreciates the opportunity to comment on the proposal for obtaining records limitation agreements in respect of machine-sensible files. If you have any questions, please do not hesitate to call Paul O'Connor, chair of TEI's IRS Administrative Affairs Committee, at 978.715.1232, or Mary L. Fahey of the Institute's professional staff at 202.638.5601.
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Title Annotation:Tax Executives Institute, Large and Midsize Business Division
Publication:Tax Executive
Date:May 1, 2004
Previous Article:TEI comments on House tax bill: June 3, 2004.
Next Article:TEI comments on proposed Schedule M-3 of Form 1120: June 7, 2004.

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