Retirement Plans – “Non-Qualified”

It usually takes a while for the bureaucracy to catch up with the business world, and the IRS has in accepting digital or computerized records to validate tax returns and deductions. Of course, it is the IRS, so there are a bunch of rules and requirements.

In the IRS Document titled Audit Techniques for Electronic Records and Data Systemsi, the IRS spells out the rules and requirements for their acceptance of electronic records in the event of an audit or request for documentation.

The Basic Overview of Requirements

Machine-sensible records must:

  • Be retained so long as their contents may become material in the administration of any internal revenue law.

  • Reconcile with the taxpayer’s books and return.

  • Contain sufficient transaction-level detail so that the information and the source documents underlying the machine-sensible records can be identified.

  • Be made available to the Service upon request and be capable of being processed.

Taxpayers must also:

  • Maintain system documentation relating to retained records.

  • Provide the Service at the time of an examination with computer resources that are necessary to process the machine-sensible records.

  • Notify its Field Director of any machine-sensible records lost, destroyed, or no longer capable of being processed.

Of course, there are many pages of expansions of these bullet points, but they give you the basic overview of what the IRS expects.

The IRS goes on to mention specific software such as Microsoft Access and Excel. The various types of records required to operate and manage a business can be maintained in a database system such as Access, but there are many others, including some accounting-specific solutions for the maintenance and filing of:

  • Employee and Personnel Information,

  • W-2 and 1099 Information,

  • General Ledger Detail,

  • Accounts Payable,

  • Chart of Accounts, and

  • Mapping of the Trial Balance to the Tax Return.

Whatever storage and retrieval systems you use, you should be able to meet the IRS requirements if you can submit the records in a form acceptable to the IRS.

Acceptable Methods of Delivery of Electronic Data to the IRS

The IRS is noticeably clear in their instruction NOT to send them accounting data via email, as they consider it insecure. In their FAQs about electronic accounting dataii, the IRS does give instructions as to acceptable methods of delivery. Here is what the IRS says:

The IRS will request electronic accounting software backup files using Form 4564, Information Document Request (IDR), early in the examination. IRS will also request the administrator’s username and password, as they are needed to read most data files.

The backup file should be provided on a CD, DVD, or a flash/jump drive. E-mail must not be used to transmit electronic records to or from the IRS, a taxpayer, or their representative, to ensure security.”

In the case of large or complicated audits, the IRS suggests that you request one of their Computer Audit Specialists (CAS) to work with you. They describe them this way: “The CAS is an experienced revenue agent who has completed an intensive computer-training program. This training concentrates on large multi-user computer systems that process voluminous data. Intensive classroom training at the University of North Texas spans almost a year and is supplemented by on-the-job training. The CAS also receives an advanced course in statistical sampling.”

Despite the IRS’s picky rules, electronic recordkeeping is the best way to go.

i Audit Techniques for Electronic Records and Data Systems, pdf from IRS.gov.

ii Use of Electronic Accounting Software Records; Frequently Asked Questions and Answers IRS.gov

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