Electronics Records: Some tips to bear in mind

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Accounting software packages offer a great deal of convenience and ease of usage as far storing Electronic Records are concerned. Most documents are scanned and allocated a specific spot in the large repository of information within the software. But, when it comes to answering any question from the IRS, there are some specifications which need to be followed.

In fact, the IRS procedures assume that the electronic records maintained and shared by businesses are only to reduce the bulky files and paper work, and ease the process. It is still mandated by the IRS that each electronic entry be supported by paper records. The electronic records can be easily modified, deleted or changed in any manner, with time, but paper records are treated as reliable sources.

Collecting, retaining and controlling transaction – related documents for the purpose of audit forms a part of the IRS requirement

  • IRC Sec. 6001 gives the Secretary of the Treasury power to require the keeping of records to show whether a taxpayer is liable for tax
  • The machine-sensible records produced by Electronic data interchange (EDI) may be combined with hard-copy records of other relevant information (such as price lists, price changes, or underlying contracts) to meet the requirements of IRC Sec. 6001
  • According to the IRS Publication #552, all requirements applying to hard copy records also apply to electronic storage systems which maintain tax books and records.
  • There is no need to produce a hard-copy printout of EDI records since, in the usual case, hard copy records are not produced or received in the ordinary course of EDI transactions. Of course, the IRS may request hard-copy printouts at any time, for which sufficient documentation in hard-copy format has to be always maintained
  • The IRS can assess additional tax if income was reported wrongly for the past 3 years, and the IRS also requires that these records be furnished up to 6 years if they fail to report any income. So, generally keeping all electronic and paper records for about  6- 7 years is the acceptable norm

In the case wherein the IRS requests for paper records, and the taxpayer is unable to furnish the same, they can push for a fraud penalty, stating that not retaining original papers is an act of negligence and fraud. Also, the IRS can request for a full copy of your software on the day of the audit to check the metadata for details on transactions being recorded and revised.

Many documents, including bank and brokerage firm statements, are now available in electronic form and are often accessible on bank and brokerage firm websites for a varying number of years as per the bank or firm you are associated with. Still, most experts recommend not relying on banks or brokerage firms to keep this documentation for you. So, it would be ideal to create your own repository of statements for reference and to serve the IRS requirement for paper records.

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