Section 100.9530 Books and Records

Section 100

TITLE 86: REVENUE

CHAPTER I: DEPARTMENT OF REVENUE

PART 100 INCOME TAX

SECTION 100.9530 BOOKS AND RECORDS

Section 100.9530  Books and

Records

a)         General

Requirements

1)         Every person liable for any tax imposed by the IITA shall keep

books and records sufficient to substantiate all information reported on any

income tax, withholding or information return required under the IITA.

2)         The books or records required by this Section shall be kept at

all times available for inspection by the Department or its duly authorized

agents and employees, and shall be retained so long as the contents may become

material in the administration of the IITA. Such books and records must be kept

in the English language. If a person retains records required to be retained by

this Part in both machine-sensible and hardcopy formats, the person shall, upon

request, make the records available to the Department in machine-sensible

format.

3)         The Department may require any person, by notice served upon

him, to make returns, render statements, or keep specific records as will

enable the Department to determine whether such person is liable for tax under

the IITA and the correct amount of the tax.

b)         What

Records Constitute Minimum Requirement

1)         In General. The records required by this Part shall be kept

accurately, but, unless otherwise required by the IITA, this Part or any tax

form, no particular form must be maintained for keeping the records. These

forms and systems of accounting shall be used to enable the Department to

ascertain whether liability for tax is incurred and, if so, the amount of the

liability. Every person who is required by this Part, instructions applicable

to any tax form, or as otherwise required by the Department, to keep any copy

of any return, schedule, statement, or other document shall keep the copy as a

part of his records.

2)         Records prepared by Automated Data Processing Systems (ADP)

n whether liability for tax is incurred and, if so, the amount of the

liability. Every person who is required by this Part, instructions applicable

to any tax form, or as otherwise required by the Department, to keep any copy

of any return, schedule, statement, or other document shall keep the copy as a

part of his records.

2)         Records prepared by Automated Data Processing Systems (ADP).

When an ADP accounting system is used to maintain all or part of a taxpayer's

accounting or financial records, the ADP system must include a method of

producing legible and readable records that will provide the necessary

information for verifying tax liabilities. If a taxpayer retains records

required to be retained by this Part in both machine-sensible and hardcopy

formats, the taxpayer shall, upon request, make the records available to the

Department in machine-sensible format in accordance with subsection (g)(2) of

this Section. An ADP 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

Department's access to and use of the ADP system on the taxpayer's premises (or

any other place where the ADP system is maintained), including personnel,

hardware, software, files, indexes, and software documentation. ADP accounting

systems encompass all types of data processing systems, stand-alone or

networked microcomputer systems, Database Management Systems (DBMS) and systems

using Electronic Data Interchange (EDI) technology.

c)         Definitions

"Database

Management System" or "DBMS" means a software system that

creates, controls, relates, retrieves and provides accessibility to data stored

in a database.

"Electronic

Data Interchange" or "EDI technology" means the

computer-to-computer exchange of business transactions in a standardized

structured electronic format.

"Hardcopy"

means any documents, records, reports, or other data printed on paper

nagement System" or "DBMS" means a software system that

creates, controls, relates, retrieves and provides accessibility to data stored

in a database.

"Electronic

Data Interchange" or "EDI technology" means the

computer-to-computer exchange of business transactions in a standardized

structured electronic format.

"Hardcopy"

means any documents, records, reports, or other data printed on paper.

"Machine-sensible

record" means a collection of related information in an electronic format.

Machine-sensible records do not include hardcopy records that are created or recorded

on paper or stored in or by an imaging system such as microfilm, microfiche or

storage-only imaging systems.

"Storage-only

imaging systems" means a system of computer hardware and software that

provides for the storage, retention and retrieval of documents originally

created on paper. It does not include any system, or part of a system, that

manipulates or processes any information or data contained on the document in

any manner other than to reproduce the document in hardcopy or as an optical image.

d)         Recordkeeping

Requirements for Machine-Sensible Records

1)         General Requirements

A)        Machine-sensible records used to establish tax compliance shall

be retained by the taxpayer in accordance with the requirements of this

Section. The retained records shall provide sufficient information to establish

matters required to be shown by a taxpayer in any tax or information returns.

The machine-sensible records shall contain sufficient transaction-level detail

information so that the details and the source documents underlying the

machine-sensible records can be identified and made available to the Department

upon request.

B)        The retained records should reconcile to the books and the tax

returns by establishing the relationship (i.e., audit trail) between the total

of the amounts in the retained records to the totals in the books and to the

tax returns

so that the details and the source documents underlying the

machine-sensible records can be identified and made available to the Department

upon request.

B)        The retained records should reconcile to the books and the tax

returns by establishing the relationship (i.e., audit trail) between the total

of the amounts in the retained records to the totals in the books and to the

tax returns.

C)        The retained records must be capable of being processed. For

purposes of this Section, "capable of being processed" means to be

able to retrieve, manipulate, print hardcopy, or produce other output. This

term does not encompass any requirement that the program or system that created

the computer data be available to process the data unless the process is

essential to a tax-related computation.

D)        Taxpayers are not required to construct machine-sensible

records other than those created in the ordinary course of business. A taxpayer

who does not create the electronic equivalent of a traditional paper document

in the ordinary course of business is not required to construct such a record

for tax purposes.

E)        Electronic

Data Interchange (EDI)

i)          Where a taxpayer uses EDI processes and technology, the level

of record detail, in combination with other records related to the transaction,

must be equivalent to the level of detail contained in an acceptable paper

record.

ii)         The taxpayer may capture the information necessary to satisfy

subsection (d)(1)(E)(i) at any level within the accounting system and need not

retain the original EDI transaction records, provided the audit trail,

authenticity and integrity of the retained records can be established.

2)         Electronic Data Processing Systems Requirements. The

requirements for an electronic data processing accounting system are similar to

that of a manual accounting system, in that an adequately designed accounting

system should incorporate methods and records that will satisfy the

requirements of this Section

rail,

authenticity and integrity of the retained records can be established.

2)         Electronic Data Processing Systems Requirements. The

requirements for an electronic data processing accounting system are similar to

that of a manual accounting system, in that an adequately designed accounting

system should incorporate methods and records that will satisfy the

requirements of this Section.

e)         Recordkeeping

Requirements – ADP Systems Documentation

1)         Upon the request of the Department, the taxpayer shall provide

a description of the business process that created the retained records. The

description shall include the relationship between the records and the tax

documents prepared by the taxpayer and the measures employed to ensure the

authenticity and integrity of the records.

2)         The taxpayer shall be capable of demonstrating:

A)        the functions being performed as they relate to the flow of

data through the system;

B)        the internal controls used to ensure accurate and reliable

processing; and

C)        the internal controls used to prevent the unauthorized

addition, alteration or deletion of retained records.

3)         The following specific documentation is required for

machine-sensible records pursuant to this Section:

A)        record

formats and layouts;

B)        field definitions (including the meaning of all

"codes" used to represent information);

C)        file

descriptions (e.g., data set name); and

D)        detailed

charts of accounts and account descriptions.

4)         Any changes to the items specified in subsection (e)(2),

together with their effective dates, shall be documented and made available to

the Department upon request.

f)         Machine-Sensible

Records Maintenance Requirements

1)         The establishment of records management practices is solely at

the discretion of the taxpayer, who ultimately bears the burden of producing

records capable of being processed at the time of an examination by the

Department

r with their effective dates, shall be documented and made available to

the Department upon request.

f)         Machine-Sensible

Records Maintenance Requirements

1)         The establishment of records management practices is solely at

the discretion of the taxpayer, who ultimately bears the burden of producing

records capable of being processed at the time of an examination by the

Department. The Department recommends but does not require that taxpayers refer

to the National Archives and Record Administration (NARA) standards for

guidance on the maintenance and storage of electronic records.  The NARA

standards may be found at 36 CFR 1234, subpart C (1996).

2)         In establishing records management practices, taxpayers should

consider, for example, the labeling of records, the security of the storage

environment, the creation of back-up copies and their storage location and the

use of periodic testing to confirm the continued integrity of the records.

3)         The taxpayer's computer hardware or software shall accommodate

the processing of or the extraction and conversion of retained machine-sensible

records.

g)         Access to Machine-Sensible Records. The manner in which the

Department is provided access to machine-sensible records as required by this

Part may be satisfied through a variety of means that shall take into account a

taxpayer's facts and circumstances. Access will be provided in one or more of

the following manners:

1)         A taxpayer may provide the Department copies of the

machine-sensible records for use on the Department's equipment;

2)         The taxpayer may arrange to provide the Department with the

hardware, software and personnel resources necessary to access and process the

machine-sensible records;

3)         The taxpayer may arrange for a third party to provide the

hardware, software and personnel resources necessary to access and process the

machine-sensible records;

4)         The taxpayer may convert machine-sensible records to a

standard record fo

provide the Department with the

hardware, software and personnel resources necessary to access and process the

machine-sensible records;

3)         The taxpayer may arrange for a third party to provide the

hardware, software and personnel resources necessary to access and process the

machine-sensible records;

4)         The taxpayer may convert machine-sensible records to a

standard record format specified by the Department on a magnetic medium that is

agreed to by the Department. This may include conversion to a different medium

(e.g., from mainframe files to microcomputer diskette). These records may be

processed on the Department's equipment or at the taxpayer's location;

5)         The taxpayer and the Department may agree on other means of

providing access to the machine-sensible records.

h)         Taxpayer

Responsibility and Discretionary Authority

1)         In discharging their responsibilities under this Section,

taxpayers are empowered to determine which of their machine-sensible records

must be retained and which records may be discarded. These determinations

require a consideration of all the facts and circumstances, including whether

duplicated or redundant records exist.

2)         In general, taxpayers should retain the machine-sensible

records that are the most direct evidence of the transactions, and have

discretion to discard duplicated records and redundant information. In

exercising this discretion, the taxpayer should generally retain those records

that best facilitate the retrieval and processing of the data during an audit.

For example, Departmental records stored in Departmental data files that are

duplicated in a central system could be discarded provided that all required

information in the Departmental records is contained in the central system and

the requirements of this Section are met

ayer should generally retain those records

that best facilitate the retrieval and processing of the data during an audit.

For example, Departmental records stored in Departmental data files that are

duplicated in a central system could be discarded provided that all required

information in the Departmental records is contained in the central system and

the requirements of this Section are met. Similarly, daily or weekly data files

could be discarded if appropriate monthly, quarterly or annual data files with

the ability to access appropriate transaction-level records are available.

3)         In conjunction with meeting the requirements of this Section,

a taxpayer may create files solely for the use of the Department. For example,

if a database management system is used, it is consistent with this Section for

the taxpayer to create and retain a file that contains the transaction-level

detail from the database management system and that meets the requirements of

this Section. The taxpayer should document the process that created the

separate file to show the relationship between that file and the original

records.

4)         A taxpayer may contract with a third party to provide

custodial or management services of the records. The contract shall not relieve

the taxpayer of its responsibilities under this Section.

i)          Alternative Storage Media. For purposes of storage and retention,

taxpayers may convert hardcopy documents received or produced in the normal

course of business and required to be retained under this Section to microfilm,

microfiche or other storage-only imaging systems and may discard the original

hardcopy documents, provided the conditions of this Section are met. These

records are not a substitute for machine-sensible records (e.g., magnetic

tapes, magnetic cartridges or magnetic disks) as defined in subsection (c)

in the normal

course of business and required to be retained under this Section to microfilm,

microfiche or other storage-only imaging systems and may discard the original

hardcopy documents, provided the conditions of this Section are met. These

records are not a substitute for machine-sensible records (e.g., magnetic

tapes, magnetic cartridges or magnetic disks) as defined in subsection (c).

Documents that may be stored on these media include, but are not limited to,

general books of account, journals, voucher registers, general and subsidiary

ledgers and supporting records of details, such as sales invoices and purchase

invoices. Microfilm, microfiche and other storage-only imaging systems shall

meet the following requirements:

1)         Documentation establishing the procedures for converting the

hardcopy documents to microfilm, microfiche or other storage-only imaging

systems must be maintained and made available on request. That documentation

shall, at a minimum, contain 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 the periods they are required to be retained

under this Section.

3)         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.

4)         Microfiche, microfilm or other storage-only imaging systems

records must be indexed, cross-referenced and labeled to show beginning and

ending numbers or beginning and ending alphabetical listing of documents

included, and must be systematically filed to permit the immediate location of

any particular record

d arranged in a manner that permits the

location of any particular record.

4)         Microfiche, microfilm or other storage-only imaging systems

records must be indexed, cross-referenced and labeled to show beginning and

ending numbers or beginning and ending alphabetical listing of documents

included, and must be systematically filed to permit the immediate location of

any particular record. A posting reference must be on each document and a

control log or catalog of the documents must be maintained.

5)         Upon request of the Department, a taxpayer must provide

facilities and equipment, in good working order, for reading, locating and

reproducing any documents maintained on microfilm, microfiche or other

storage-only imaging systems.

6)         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 recognized as words or complete numbers.

7)         There must not be substantial evidence that the microfilm,

microfiche or other storage-only imaging systems lack authenticity or

integrity.

j)          Effect

on Hardcopy Recordkeeping Requirements

1)         Hardcopy records may be retained on a recordkeeping medium

provided in subsection (i).

2)         If hardcopy records are not produced or received or required

to be produced or received in the ordinary course of transacting business

(i.e., when the taxpayer uses EDI technology), such hardcopy records need not

be created

ity.

j)          Effect

on Hardcopy Recordkeeping Requirements

1)         Hardcopy records may be retained on a recordkeeping medium

provided in subsection (i).

2)         If hardcopy records are not produced or received or required

to be produced or received in the ordinary course of transacting business

(i.e., when the taxpayer uses EDI technology), such hardcopy records need not

be created.

3)         Unless hardcopy records are required to be provided or

received, hardcopy records generated at the time of a transaction need not be

retained if all the details relating to the transaction are subsequently

received by the taxpayer in an EDI transaction and are retained by the taxpayer

in accordance with this Section.

4)         Computer print-outs that are created for validation, control

or other temporary purposes need not be retained.

5)         Nothing in this Section shall prevent the Department from

requesting hardcopy print-outs of retained machine-sensible records. These

requests may be made either at the time of an examination or in conjunction

with the evaluation described in subsection (k)(2)(G) of this Section.

k)         Department Authorization to Destroy Records Sooner Than Would

Otherwise Be Permissible

1)         In all cases, the Department may, in writing, authorize the

destruction of books and records and other papers prior to the expiration of

the periods of time during which the taxpayer, except for the written authorization

from the Department, is required to keep books and records. The Department may

authorize destruction of records if the records are preserved in microfilm,

microfiche, other storage-only imaging systems or an electronic data processing

system and meet the conditions prescribed in this Section.

2)         Record

Retention Limitation Agreements

A)        The Department may, at the request of the taxpayer, enter into

a record retention limitation agreement with a taxpayer that may modify or

waive any of the specific requirements of this Section

lm,

microfiche, other storage-only imaging systems or an electronic data processing

system and meet the conditions prescribed in this Section.

2)         Record

Retention Limitation Agreements

A)        The Department may, at the request of the taxpayer, enter into

a record retention limitation agreement with a taxpayer that may modify or

waive any of the specific requirements of this Section. A taxpayer's request

for an agreement must specify which records (if any) the taxpayer proposes not

to retain and provide the reasons for not retaining those records as well as

proposing any other terms of the requested agreement. The taxpayer shall remain

subject to all the requirements of this Section that are not modified, waived

or superseded by a duly approved record retention limitation agreement.

B)        The Department may revoke or modify a record retention limitation

agreement or any provision of an agreement.

C)        The record retention limitation agreement shall specifically

identify which of the taxpayer's records the Department has determined are not

necessary for retention and which the taxpayer may discard. The agreement shall

also clearly state each authorized variance, if any, from the normal provisions

of this Section. The agreement shall also document other understandings reached

with the Department, which may include, but not be limited to:

i)          the conversion of files created on an obsolete computer

system;

ii)         restoration of lost or damaged files and the actions to be

taken;

iii)        use

of taxpayer computer resources.

D)        The Department shall consider a taxpayer's request for a record

retention limitation agreement and notify the taxpayer of the actions to be

taken. The Department's decision to enter or not to enter into a record

retention limitation agreement shall not relieve the taxpayer of the

responsibility under this Section to keep adequate and complete records

necessary to a determination of tax liability

Department shall consider a taxpayer's request for a record

retention limitation agreement and notify the taxpayer of the actions to be

taken. The Department's decision to enter or not to enter into a record

retention limitation agreement shall not relieve the taxpayer of the

responsibility under this Section to keep adequate and complete records

necessary to a determination of tax liability.

E)        Unless otherwise specified, an agreement shall not apply to

accounting and tax systems added subsequent to the effective date of the

agreement. All machine-sensible records produced by a subsequently added

accounting or tax system shall be retained by the taxpayer in accordance with

this Section until a new agreement is entered into with the Department.

F)         Unless otherwise specified, an agreement shall not apply to

any subsidiary or other entity that, subsequent to the effective date of a

record retention limitation agreement, is acquired by the taxpayer. All

machine-sensible records produced by the acquired subsidiary shall be retained

pursuant to this Section and any record retention limitation agreement that may

have been in effect for the acquired subsidiary ("pre-acquisition

agreement"). The provisions of the pre-acquisition agreement shall

continue to apply to the acquired subsidiary until revoked or modified by the

Department or a new agreement applying to the acquired subsidiary is entered.

G)        To evaluate the propriety of a record retention limitation

agreement, the Department may conduct an evaluation of the taxpayer's record

retention practices. The evaluation may include a review of the taxpayer's

relevant data processing and accounting systems, including systems using EDI

technology

d by the

Department or a new agreement applying to the acquired subsidiary is entered.

G)        To evaluate the propriety of a record retention limitation

agreement, the Department may conduct an evaluation of the taxpayer's record

retention practices. The evaluation may include a review of the taxpayer's

relevant data processing and accounting systems, including systems using EDI

technology.

i)          The Department shall notify the taxpayer of the results of

any evaluation, including acceptance or rejection of any proposals made by the

taxpayer (e.g., to discard certain records) or any changes considered necessary

to bring the taxpayer's practices into compliance with this Section.

ii)         The evaluation of a taxpayer's records retention practices is

not directly related to the determination of tax reporting accuracy for a

particular period or return, nor is the evaluation an "audit".