IRS Rev. Proc. 97-22
Retention of Books and Records
SECTION 1. PURPOSE
This revenue procedure provides guidance
to taxpayers that maintain books and records by using an electronic
storage system that either images their hardcopy (paper) books and
records, or transfers their computerized books and records, to an
electronic storage media, such as an optical disk. Records maintained
in an electronic storage system that complies with the requirements
of this revenue procedure will constitute records within the meaning
of § 6001 of the Internal Revenue Code.
SECTION 2. BACKGROUND
.01 Section 6001 provides that every person
liable for any tax imposed by the Code, or for the collection thereof,
must keep such records, render such statements, make such returns,
and comply with such rules and regulations as the Secretary may
from time to time prescribe. Whenever necessary, the secretary may
require any persons by notice served upon that person or by regulations,
to make such returns, render such statements, or keep such records,
as the Secretary deems sufficient to show whether or not that person
is liable for tax.
.02 Section 1.6001-l(a) of the Income Tax
Regulations provides that, except for farmers and wage-earners,
any person subject to income tax, or any person required to file
a return of information with respect to income, must keep 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 that person in any return of such tax or
information.
.03 Section 1.6001-l(e) provides that the
books or records required by § 6001 must be kept available
at all times for inspection by authorized internal revenue officers
or employees, and must be retained so long as the contents thereof
may become material in the administration of any internal revenue
law.
SECTION 3. SCOPE
.01 This revenue procedure applies to taxpayers
who maintain books and records using an "electronic storage
system." An electronic storage system is a system to prepare,
record, transfer, index, store, preserve, retrieve, and reproduce
books and records by either:
( I ) electronically imaging hardcopy documents
to an electronic storage media; or
(2) transferring computerized books and records
to an electronic storage media using a technique such as "COLD"
(computer output to laser disk), which allows books and records
to be viewed or reproduced without the use of the original program.
.02 The requirements of this revenue procedure
pertain to all matters under the jurisdiction of the Commissioner
of Internal Revenue including, but not limited to, income, excise,
employment, and estate and gift taxes, as well as employee plans
and exempt organizations.
.03 A taxpayer's use of a third party (such
as a service bureau or time-sharing service) to provide the taxpayer
with an electronic storage system for its books and records does
not relieve the taxpayer of the responsibilities described in this
revenue procedure.
.04 Except as otherwise provided in this
revenue procedure, all requirements of § 6001 that apply
to hardcopy books and records apply as well to books and records
that are stored electronically pursuant to this revenue procedure.
SECTION 4. ELECTRONIC STORAGE SYSTEM REQUIREMENTS
.01 General Requirements
(1) An electronic storage system must ensure
an accurate and complete transfer of the hardcopy or computerized
books and records to an electronic storage media The electronic
storage system must also index, store, preserve, retrieve, and reproduce
the electronically stored books and records.
IRS Revenue Procedure 97-22 13
(2) An electronic storage system must include:
(a) reasonable controls to ensure the integrity,
accuracy, and reliability of the electronic storage system;
(b) reasonable controls to prevent and detect
the unauthorized creation of, addition to, alteration of, deletion
of, or deterioration of electronically stored books and records;
(c) an inspection and quality assurance program
evidenced by regular evaluations of the electronic storage system
including periodic checks of electronically stored books and records;
(d) a retrieval system that includes an indexing
system (within the meaning of section 4.02 of this revenue procedure);
and
(e) the ability to reproduce legible and
readable hardcopies (within the meaning of section 4.01(3) of this
revenue procedure) of electronically stored books and records.
(3) All books and records reproduced by the
electronic storage system must exhibit a high degree of legibility
and readability when displayed on a video display terminal and when
reproduced in hardcopy. The term "legibility" means the
observer must be able to identify all letters and numerals positively
and quickly to the exclusion of all other letters or numerals. The
term "readability" means that the observer must be able
to recognize a group of letters or numerals as words or complete
numbers. The taxpayer must ensure that the reproduction process
maintains the legibility and readability of the electronically stored
document.
(4) The information maintained in an electronic
storage system must provide support for the taxpayer's books and
records (including books and records in an automated data processing
system). For example, the information maintained in an electronic
storage system and the taxpayer's books and records must be cross
referenced in a manner that provides an audit trail between the
general ledger and the source document(s).
(5) For each electronic storage system used,
the taxpayer must maintain, and make available to the Service upon
request, complete descriptions of:
(a) the electronic storage system, including
all procedures relating to its use
(b) the indexing system (see section 4.02
of this revenue procedure).
(6) At the time of an examination, or for
the tests described in section 5 of this revenue procedure, the
taxpayer must:
(a) retrieve and reproduce (including hardcopies
if requested) electronically stored books and records; and
(b) provide the Service with the resources
(e.g., appropriate hardware and software, personnel, documentation,
etc.) necessary to locate, retrieve, read, and reproduce (including
hardcopies) any electronically stored books and records.
(7) An electronic storage system must not
be subject, in whole or in part, to any agreement (such as a contract
or license) that would limit or restrict the Service's access to
and use of the electronic storage system on the taxpayer's premises
(or any other place where the electronic storage system is maintained),
including personnel, hardware, software, files, indexes, and software
documentation.
(8) The taxpayer must retain electronically
stored books and records so long as their contents may become material
in the administration of the Internal Revenue laws under §
1.6001- I(e).
(9) The taxpayer may use more than one electronic
storage system. In that event, each electronic storage system must
meet the requirements of this revenue procedure. Electronically
stored books and records that are contained in an electronic storage
system with respect to which the taxpayer ceases to maintain the
hardware and the software necessary to satisfy the conditions of
this revenue procedure will be deemed destroyed by the taxpayer,
unless the electronically stored books and records remain available
to the Service in conformity with this revenue procedure.
(10) Taxpayers may use reasonable data compression
or formatting technologies as part of their electronic storage system
so long as the requirements of this revenue procedure are satisfied.
.02 Requirements of an Indexing System.
(1) For purposes of this revenue procedure,
an "indexing system" is a system that permits the identification
and retrieval for viewing or reproducing of relevant books and records
maintained in an electronic storage system. For example, an indexing
system might consist of assigning each electronically stored document
a unique identification number and maintaining a separate database
that contains descriptions of all electronically stored books and
records along with their identification numbers. In addition, any
system used to maintain, organize, or coordinate multiple electronic
storage systems is treated as an indexing system under this revenue
procedure. The requirement to maintain an indexing system will be
satisfied if the indexing system is functionally comparable to a
reasonable hardcopy filing system. The requirement to maintain an
indexing system does not require that a separate electronically
stored books and records description database be maintained if comparable
results can be achieved without a separate description database.
(2) Reasonable controls must be undertaken
to protect the indexing system against the unauthorized creation
of, addition to, alteration of, deletion of, or deterioration of
any entries.
.03 Recommended Practices. The implementation
of records management practices is a business decision that is solely
within the discretion of the taxpayer. Records management practices
may include the labeling of electronically stored books and records,
providing a secure storage environment, creating back-up copies,
selecting an off-site storage location, retaining hardcopies of
books or records that are illegible or that cannot be accurately
or completely transferred to an electronic storage system, and testing
to confirm records integrity.
SECTION 5. DISTRICT DIRECTOR TESTING
.01 The District Director may periodically
initiate tests of a taxpayer's electronic storage system. These
tests may include an evaluation (by actual use) of a taxpayer's
equipment and software, as well as the procedures used by a taxpayer
to prepare, record, transfer, index, store, preserve, retrieve,
and reproduce electronically stored documents. In some instances,
the District Director may choose to review the internal controls,
security procedures, and documentation associated with the taxpayer's
electronic storage system.
.02 The tests described in section 5.01 of
this revenue procedure are not an "examination," "investigation,"
or "inspection" of the books and records within the meaning
of § 7605(b), or a prior audit for purposes of §
530 of the Revenue Act of 1978, 1978-3 (Vol. I ) C.B. 119, as amended
by § 1122 of the Small Business Job Protection Act of 1996,
because these tests are not directly related to the
16 New Federal Procedures and Regulations
for Document Management determination of the tax liability of a
taxpayer for a particular taxable period.
.03 The District Director must inform the
taxpayer of the results of any tests under this section.
SECTION 6. COMPLIANCE
.01 A taxpayer's electronic storage system
that meets the requirements of this revenue procedure will be treated
as being in compliance with the recordkeeping requirements of §
6001 and the regulations thereunder.
.02 A taxpayer's electronic storage system
that fails to meet the . requirements of this revenue procedure
may be treated as not being in compliance with the recordkeeping
requirements of § 6001 and the regulations thereunder.
See section 9 of this revenue procedure for applicable penalties.
However, even though a taxpayer's electronic storage system fails
to meet the requirements of this revenue procedure, the penalties
described in section 9 of this revenue procedure may not apply if
the taxpayer maintains its original books and records, or maintains
its books and records in micrographic form in conformity with Rev.
Proc. 81-46, 1981-2 C.B. 621.
SECTION 7. DESTRUCTION AND DELETION OF ORIGINAL
BOOKS AND RECORDS
This revenue procedure permits the destruction
of the original hardcopy books and records and the deletion of the
original computerized records (other than "machine-sensible"
records required to be retained by Rev. Proc. 91 -59, 1991 -2 C.B.
841), after the taxpayer:
( I ) has completed its own testing of the
electronic storage system that establishes that hardcopy or computerized
books and records are being reproduced in compliance with all the
provisions of this revenue procedure; and
(2) has instituted procedures that ensure
its continued compliance with all the provisions of this revenue
procedure.
SECTION 8. IMPACT ON MACHINE-SENSIBLE RECORDS
The provisions of this revenue procedure
regarding electronically stored books and records do not relieve
taxpayers of the responsibility of retaining any other books and
records required to be retained under § 6001. Such other
books and records may include "machine-sensible" records
required to be retained by Rev. Proc. 91 59 in connection with the
taxpayer's use of an automatic data processing (ADP) system.
SECTION 9. PENALTIES
The District Director may issue a Notice
of Inadequate Records pursuant to § 1.6001-l(d) if the
taxpayer's books and records are available only as electronically
stored books and records and the taxpayer's electronic storage system
fails to meet the requirements of this revenue procedure. Taxpayers
whose electronic storage system fails to meet the requirements of
this revenue procedure may also be subject to applicable penalties
under subtitle F of the.Code, including the § 6662(a) accuracy-related
civil penalty and the § 7203 willful failure criminal penalty.
SECTION 10. INTERNAL REVENUE SERVICE OFFICE
CONTACT
.01 Questions regarding this revenue procedure
should be directed to the office of the Assistant Commissioner (Examination).
The telephone number for this office is (202) 622-5480 (not a toll-free
number). Written questions should be addressed to:
Assistant Commissioner (Examination)
Attention: CP:EX Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, D.C. 20224
.02 Questions regarding the application of
this revenue procedure o a specific factual situation should be
directed to the appropriate District Director.
SECTION 11. PAPERWORK REDUCTION ACT
The collections of information contained
in this revenue procedure have been reviewed and approved by the
Office of Management and Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under control number 1545- 1533.
An agency may not conduct or sponsor, and
a person is not required to respond to, a collection of information
unless the collection of information displays a valid control number.
The collections of information are in sections
4 and 5 of this revenue procedure. This information is required
to ensure that records maintained in an electronic storage system
will constitute records within the meaning of § 6001. The
collections of information are mandatory for a taxpayer who chooses
to electronically store its books and records. The likely respondents
are individuals, state or local governments, farms, business or
other for-profit institutions, federal agencies or employees, nonprofit
institutions, and small businesses or organizations.
The estimated total annual recordkeeping
burden is 1,000,400 hours.
The estimated annual burden per recordkeeper
will vary from 20 hours to 22 hours, depending on individual circumstances,
with an estimated average of 20 hours. The estimated number of recordkeepers
is 50,000.
Books or records relating to a collection
of information must be retained as long a their contents may become
material in the administration of any internal revenue law. Generally
tax returns and tax return information are confidential, as required
by 26 U.S.C. 6103.
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