Electronic Records Storage

By Hollingsworth, Tracy | Journal of Accountancy, June 1997 | Go to article overview

Electronic Records Storage


Hollingsworth, Tracy, Journal of Accountancy


Record retention bedevils many businesses because they must maintain sufficient records to substantiate virtually every item reported on tax and information returns. Some companies have defined and even limited the documentation they must maintain by entering into a record retention agreement with the Internal Revenue Service. However, such agreements are not always an option and often do not adequately address electronic data. In Revenue Procedure 97-22, the IRS provides guidance on maintaining records by using an electronic storage system that either images hardcopy books and records or transfers computerized books and records to an electronic storage medium.

The procedure makes clear the IRS is very concerned about the integrity of electronic storage systems and puts the onus on taxpayers to prove their systems are accurate and reliable and have not been tampered with. In addition, the IRS insists that a taxpayer's electronic systems support the taxpayer's books and records, include indexing and retrieval systems and provide an audit trail between the general ledger and the source documents. The taxpayer also is obligated to provide the IRS with the resources necessary to locate, retrieve, read and reproduce any electronically stored books and records.

Observation: The new procedure may allow taxpayers to eliminate some paper records; however, if a system fails to operate as required in the procedure, the taxpayer may face penalties if it has not maintained its books and records in original or authorized micrographic form.

Companies that change their computer storage systems must consider how they will provide the IRS with access to data from old systems. Corporate tax departments could help by developing electronic storage systems that both meet the procedure's requirements and assist them in providing the requested data to the IRS during examinations. A tax department would have to be able to show the IRS the links from the financial accounting records to the tax returns and produce specialized documentation, such as transfer pricing information.

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Filing for Help

* According to Internal Revenue Bulletin 1997-9, cash paid in 1997 to a household employee such as a housekeeper is not subject to Federal Insurance Contribution Act taxes if it is less than $1,000. When a household employee receives more than $1,000 in 1997, then all the cash paid that employee is subject to FICA taxes.

Taxing Tenure

* A state university allows tenured professors to retire early and receive up to a full year's salary in exchange for the termination of their employment and the surrender of their tenure rights. …

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