Electronic Documents and Record Retention

8/19/2010

By Mark Corey, CPA

A question that often arises for businesses is what are the rules related to record retention and electronic document storage and retrieval? There are both federal and state requirements that deal with record retention and electronic documents.

According to federal law, all taxpayers subject to income tax must keep books and records that 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. §6001 requires the taxpayer keep such records available at all times for inspection by authorized internal revenue officers for the statutory period or as required by the tax law.

Revenue Procedure 97-22-Recordkeeping Requirements-Electronic Storage System Records either created electronically or transferred to an electronic media kept in compliance with these guidelines will be deemed in compliance with code section 6001 (recordkeeping requirements). The taxpayer’s storage system must reliably transfer, store, index, preserve, retrieve and reproduce electronically stored books and records, and any records reproduced must have a high degree of legibility when displayed or reproduced. Taxpayer is allowed to destroy original records as long as they maintain their electronic records in compliance with this revenue procedure.

Colorado - §24-71.3-112 Retention of Electronic Records -Originals

If a law requires that a record be retained, the requirement is satisfied by retaining an electronic record of the information in the record that accurately reflects the information set forth in the record after it was first generated in its final form and remains accessible for later reference. Documents can be created or converted to electronic form and maintained as part of the taxpayer’s record retention requirement.

New Mexico Tax Ruling 100-4-1

Citing Section 7-1-10 NMSA 1978, the New Mexico rules state in part: Every person required by the provisions of any statute administered by the department to keep records and documents and every taxpayer shall maintain books of account or other records in a manner that will permit the accurate computation of state taxes or provide information required by the statute under [which] he is required to keep records.... So as long as your electronic document retention system keeps all documents in a form that will allow you to compute state taxes accurately or provide the required information, then it will be acceptable for New Mexico records retention.

Wyoming State Statute 40-21-107

Legal recognition of electronic records states, "A record or signature may not be denied legal effect or enforceability solely because it is in electronic form." And "If a law requires a record to be in writing, an electronic record satisfies the law."

Washington Statute 458-20-254(8)

Under this Washington statute, taxpayers are allowed to convert and retain documents in a "storage only imaging system" and may discard the original hard copy as long as the other provisions of this statute are met. Some of the specific requirements of this statute include:

1. Documentation establishing the procedures for converting the hard-copy documents to microfilm, microfiche or other storage-only imaging system must be maintained and made available upon request. Such documentation must, at a minimum, contain a sufficient description to allow an original document to be followed through the conversion system as well as internal procedures established for inspection and quality assurance.
2. Procedures must be established for the effective identification, processing, storage, and preservation of the stored documents and for making them available for a period of five years.
3. Upon request by the department, a taxpayer must provide facilities and equipment for reading, locating, and reproducing any documents maintained on microfilm, microfiche or other storage-only imaging system.
4. When displayed on such equipment or reproduced on paper, the documents must exhibit a high degree of legibility and readability. For this purpose, legibility is defined as the quality of a letter or numeral that enables the observer to identify it positively and quickly to the exclusion of all other letters or numerals. Readability is defined as the quality of a group of letters or numerals being recognizable as words or complete numbers.
5. All data stored on microfilm, microfiche or other storage-only imaging systems must be maintained and arranged in a manner that permits the location of any particular record.
6. There must be no substantial evidence that the microfilm, microfiche, or other storage-only imaging system lacks authenticity or integrity.

The key to the federal and state rules are that the electronic documents are secure (not alterable after stored), are legible upon retrieval and the correct document can be retrieved quickly.