Originally published in
Reprinted with permission

Are You Still Saving More Paper Than The IRS Requires?

Most accounts payable professionals can’t wait to throw out every single piece of paper they don’t need. There is just one problem with that: The IRS. Unfortunately, many companies are unaware of IRS’ regulations and end up saving too much paper. The introduction of imaging systems at many companies makes the issue even more confusing. To help our subscribers wit this issue; Managing Accounts Payable presents a synopsis of the current regulations based on information supplied by RECAP, Inc.

The pertinent governing regulations are:

• Internal Revenue Code Section 6001
• Revenue Procedure 91-59
• Revenue Procedure 97-22
• Revenue Procedure 98-25

IRS Code states, "any person subject to income tax…must keep such books and records…required to be shown by that person in any return of such tax or information." Revenue Procedure 91-59 says that this applies to:

• All paper records
• Electronic records for tax years commencing prior to 1/1/98.

Before taking a look at this new procedure, it is necessary to find out about Rev. Proc.97-22. This procedure applies to taxpayers that maintain books and records using an ‘electronic storage system’ even if serviced by a third party. This electronic system must provide an electronic image of hard copy documents or transfer to electronic storage and allows records to be viewed without the original program.

When a company installs a new accounting system, few stop to consider IRS requirements for prior years. They may ensure that the new system meets IRS guidelines, but they overlook the old. However, the IRS never forgets. It has requirements for companies that replace a system. The taxpayer that does this must:

• Be able to process and retrieve the machine-sensible records using the original programs; or
• Demonstrate that any reformatting and processing ensures the continued integrity, accuracy, and reliability of the data.

As companies rush to convert their old systems in an attempt to avoid Y2K disasters, many forget about the IRS requirements. Don’t let this happen at your company.

Document retention for IRS purposes is not an issue that account payable manager normally address alone. It should be done in conjunction with management, representative from the tax department, other accounting units, and even representative from your company’s legal department. The information provided above will give you a basis to make intelligent decisions based on what the IRS is likely to require.

Revenue Procedure 98-25

This procedure makes document retention requirements uniform and sensible. It applies to:

• All taxpayers with assets of $10 million or higher;
• Some smaller taxpayers;
• All controlled foreign corporations;
• All insurance companies

This practice applies if:

• Records are only in machine sensible form;
• Machine sensible records are used for computations, it can not be easily recomputed without a computer;
• You use a third party to provide services

Machine sensible records must:

• Be retained as long as they are required
• Provide sufficient information to support and verify tax return and reconcile with tax payers books;
• Be made available to the IRS and be capable of being processed;
• Is retained after disposition of a subsidiary.

Must maintain and make available documentation of the business processes that:

• Create the retained records;
• Modify and maintain its records
• Evidence the authenticity and integrity;
• Must establish and document audit trails spelled out in this revenue procedure.

The taxpayer must:

• Provide the IRS with resources necessary to process taxpayers machine sensible books and records;
• Notify the IRS if any machine sensible records are lost, stolen, destroyed or otherwise no longer capable of being processed.

"Are You Still Saving More Paper Than the IRS Requires?" ©1999 Institute of Management and Administration, Inc. For subscription information call (212) 244-0360 or send e-mail to SUBSERVE@IOMA.COM

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