Becki:
This is Becki Dobyns.

I’m talking with Monica Baker about electronic records.

Monica, what do we mean by “electronic records?”

Monica:
As more small business taxpayers are going paperless, they are using accounting software to maintain their books and records electronically.

Electronic records can include databases, saved files, e-mail, instant messages, faxes, and voice messages.

Businesses need to have the same good electronic recordkeeping habits as they do for paper records.

Becki:
Are taxpayers required to retain all records electronically, or can they keep paper copies instead?

Monica:
Generally, if a small business taxpayer has assets of less than $10 million, they may retain paper records.

Keep in mind that, whether a taxpayer chooses to maintain paper or electronic records, the IRS must be able to trace transactions through the records to source documents.

Becki:
Can taxpayers who are being audited provide their books and records to IRS examiners in an electronic format?

Monica:
Most certainly! The IRS realizes that small business owners who file and pay their taxes electronically are more likely to use electronic recordkeeping systems too.

They can provide their electronic records on portable storage media - such as a CD, flash drive, or DVD.

These devices require little storage space, and can save considerable time and effort for both the IRS examiner and the taxpayer.

IRS examiners can also request records from taxpayers that are maintained in electronic format.

Becki:
Should taxpayers or authorized representatives e-mail books, records or other tax information to IRS examiners?

Monica:
No, they really shouldn’t.

Our systems for managing tax data are secure, but where e-mail is concerned, we all know the potential for something to get misdirected.

We’re working on technology that will allow secure transmission of documents, but we’re not quite there yet.

Becki:
How long do taxpayers need to keep their electronic tax records?

Monica:
The same timeframes that apply to paper records also apply to electronic records.

Generally, that’s until the statute of limitations for the tax return the records relate to has expired.

It’s normally three years from the due date of the return, or the date the return was filed - whichever is later.

Becki:
Are there exceptions?

Monica:
Yes.

If the taxpayer acquired an asset or improved one, they should keep those records for at least three years past the tax year when they either disposed of or fully depreciated the asset.

If the taxpayer had a net operating loss, they should keep the relevant records until the loss is fully utilized or expired.

Becki:
Has the IRS issued guidance to taxpayers for maintaining their electronic books and records?

Monica:
Yes.

Revenue Procedure 98-25 is the IRS’s comprehensive guidance on maintaining electronic records.

For more information, use the search term electronic recordkeeping on our Web site, IRS.gov.

Becki:
Thank you, Monica.

I’ve been talking with Monica Baker of the IRS.

This is Becki Dobyns.