Recordkeeping Phone Forum
Moderator Welcome to the Recordkeeping conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, today's conference is being recorded.
I would now like to turn the conference to your host, Mr. Alan Gregerson.
A. Gregerson Good day, everyone. My name is Alan Gregerson. I am a senior stakeholder liaison with the Internal Revenue Service, and I will be your moderator for today's event. Thank you for participating in our national phone forum on recordkeeping. Please be aware that this program is being recorded and will be maintained in accordance with federal recordkeeping laws.
Before we begin, I need to review some administrative items. First, our procedures for granting CPE credit: IRS stakeholder liaison field organization has entered into an agreement with the office of professional responsibility to meet the requirements of a sponsor of continuing professional education for enrolled agents. Enrolled agents viewing this phone form will be entitled to one CPE credit provided they participate for at least 50 minutes from its start. Tax professionals may receive a certificate of completion that can be used to request the continuing professional education credit if the phone form meets your organization or state's CPE requirements. To receive a certificate of completion for today's phone forum, you must have called the number and entered the pin that was assigned to you when you registered. This is so we can verify your participation.
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Here is some background information on today's speakers. Diana Stewart has been employed by the IRS for over 30 years. Her positions have included office auditor and revenue agent. After serving as a revenue agent for approximately 15 years, Diana was selected as a group manager and remained in that position until she was assigned to headquarters as a senior program analyst with SB/SE operation support in 2009. Diana is currently a senior policy analyst in SB/SE exam policy.
David Tracewell has over 22 years of experience with the Internal Revenue Service. Dave has spent his entire career as a revenue agent in examination while he has held numerous positions within the organization. Currently, Dave is the senior program analyst for the Small Business Self-Employed division, Examination General Processes function. Previously, Dave has been a large case examiner in the Large Business and International division. Prior to Dave's employment with the IRS, he was a senior tax examiner with the State of West Virginia Business Tax Department.
Mike Landsmann is a senior tax analyst for SB/SE Headquarters Exam Policy. Mike has worked for the IRS for over 25 years. He has worked in Headquarters, representing Campus Examination for the last nine years. In this position, he issues guidance to the campuses on various issues examined through correspondence. In addition to a diverse campus background, Mike has also held positions with the Regional Taxpayer Advocate Office, Campus, returns processing, quality assurance, and held frontline and midlevel management positions in the Philadelphia campus.
With that, I will turn it over to our presenter, Diana.
D. Stewart I would like to again welcome everyone and thank you for attending today's phone forum. As you will see on slides two and three in the material you were provided, topics we will cover in this forum include: why books and records are needed, the definition of books and records, some specific types of records needed, how to maintain good books and records, who's responsible for the books and records, how long to retain your books and records, some basic examination procedures, and what to expect at an IRS examination. Given the number of topics to be covered, we will only be addressing the basics of each of these. My goal is to give you an awareness of what we at the IRS look for in books and records so that you may be better prepared for an audit.
Let's move to slide number four titled, Necessity of Books and Records. There are a number of reasons that you and the Service need books and records. First, they will allow you to monitor the progress of your business. Your records will show whether the business is improving, which items are selling, or what changes should be made. This information will increase the likelihood of business success because it allows for informed decisions to be made during the year. Having your records available will strengthen and focus your business plan because it will be easier to stay on track by monitoring your business goals.
Secondly, they're used to prepare financial statements. Good records are needed to prepare accurate financial statements and will help you manage your businesses when dealing with banks and creditors. Every creditor will require financial statements before extending a loan or credit line to a business.
When records are maintained in a timely manner, for example, as the transactions take place, the business is organized and the direction remains visible. This will make it relatively easy to prepare a financial statements and tax returns. On the other hand, when the records have not been well maintained, year-end tax return preparation becomes the task of booking a year's worth of transactions. This can be stressful, time consuming, and an unpleasant experience.
Third, properly maintained books and records will allow you to keep track of deductible expenses. Businesses and individuals must keep records of all deductible expenses. When transactions are not recorded as they occur, it's easy to forget or possibly duplicate them when preparing the tax returns.
To make sure all allowed deductible expenses are included, record and categorize them as they occur. Recording can be done simply by writing expenses and income in a notebook or journal as paid and received. Recording can also be made by entries into a formal set of books or through the use of accounting software.
Slide number five points out that books and records assist you in preparing your tax returns. Businesses are required to pay the correct amount of tax and account for their income and expenses. These records must support the income, expenses, and credits you report on your returns. Generally, these are the same records used to monitor the business and prepare financial statements. A small amount of time spent each work during the year to organize and record transactions will benefit the business at the end of the year and improve productivity all year long.
Speaking of preparing, books and records should be maintained so you can be ready for an examination. When called for an examination, it's imperative that you and or your representative understand what records were used to determine each amount entered on the tax return. These amounts will need to be traceable back to the actual records and source documents. When records are kept organized and financial statements clearly reflect all of the year's transactions, critical or unforeseen issues are less likely to arise during an examination.
During an examination, good books and records will also help answer to everyone's satisfaction a number of questions such as, Is this a business activity engaged in for profit? The maintenance of good books and records is one indication that there is an activity for profit. This shows that the undertaking is managed in a business-like manner and lends credibility to the venture. Recordkeeping is an important task that is often over looked or neglected by many individuals starting a new business.
Two elements are needed to verify a deduction claimed on a tax return. The first is substantiation of the payment of an expense with a cancelled check, a credit card receipt, debit card receipt and bank statement, or other form of payment. Secondly, if they have to show that the expense is related to the business. For example, that there is a business purpose for it and that it is ordinary and necessary in a particular trade or business. Remember, your deductions are a matter of legislative grace, and you must establish that you are entitled to them.
Complete and accurate books and records give you and the auditor that needed additional proof of payment. But proof of payment alone is not enough. By itself, proof of payment such as a cancelled check or charge receipt does not establish that a tax deduction is warranted. You must also keep other documents such as invoices, receipts, or credit card sales slips. You must be prepared to explain how items are used in the business. Many business and individual deductions are not allowed during an examination simply due to improper recordkeeping.
To slide six, The Definition of Books and Records. To begin, we must first define a record. A record is any information that is created, received, or maintained as suitable evidence. A record is the actual document such as the receipt or invoice that proves an expense was incurred. The record can be a check, invoice, or even a list of these expenses. While saving receipts is important, it is just as important to make a listing of the receipts and include that dates, amounts, and purpose of each transaction. Organizing records in this manner will allow business or individual to readily separate taxable income from nontaxable income to identify deductible expenses, to keep track of investments, and to manage their business affairs.
What is the purpose of a record? A record is used to justify the three axioms of tax law. Number one, the business purpose: Is it needed? Number two, substantiation or verification, and number three, reasonableness: Is the transaction typical?
Records include supporting documents. Purchases, sales, payroll, and other transactions in a business will generate supporting documents. These might include sales slips, paid bills, deposit slips, etc., an example of the credit card receipt that proves the payment of an expense. The payment document should be attached to the invoice, sales receipt, or other related source document at the time of the transaction. All of these records should be maintained in an orderly fashion and be available in the case of an IRS examination.
What is an accounting entry? This is a physical documentation of a transaction such as an income or expense item. It could be on an accounting ledger, on accounting software programs such as QuickBooks, on a spreadsheet, or even on the back of an envelope.
What is an accounting book? The combined ledgers and journals in a book form. This should be a list of your income and expenses and not necessarily in any accounting format I described earlier.
What is an income statement? An income statement shows the income and expenses of the business and shows the profit and loss of the business for a given period of time. Generally, the income statement is prepared monthly and yearly.
What is a balance sheet? A balance sheet will show the assets, liabilities, and owner equity in the business on a given date, usually annually.
I will now turn the presentation over to Dave Tracewell as we move to slide seven.
D. Tracewell Moving to slide number seven, The Definition of Electronic Books and Records. The Uniform Electronic Transaction Act defines electronic records as a record created, generated, sent, communicated, received, or stored by electronic means. This is a very broad definition, which suggests that all information stored or transmitted on any digital media could be considered an electronic record. It is estimated that 93 percent of all business documents are created electronically and only approximately 30 percent are ever printed to paper.
A question asked on a previous phone forum was, Can auditors accept electronic books and records? As slide number eight points out records can be accepted by the IRS in electronic format. Records can be provided on electronic media such as a CD, a thumb drive, memory card, or external hard drive. Auditors generally can accept any evidence that taxpayers and or their representatives provide in support of an issue. However, most rejected electronic documents are based on the auditor's inability to read the file using their computer. Often, the electronic documents will make it more efficient for an auditor to review records. The electronic records will save the auditor time in transcribing details from the records to the auditors work papers.
There are many electronic reports that can be generated and provided to the auditor to assist in a timely completion of the examination. These audit trails are important and will assist the auditor at the initial interview.
However, there are some general rules that should be followed when providing electronic records to the IRS auditors. The records should be submitted in a format that can readily be reviewed on IRS computers and software. First, files should be submitted in either Microsoft Access or Excel format or a delimited or fixed width format. A delimited or fixed width format file can readily be loaded to our Microsoft Access or Microsoft Excel format using the data transformation service native to both of these products.
Second, the auditor will not accept data that uses your proprietary software without first consulting an IRS computer audit specialist. The specialist assists the auditor in processing, extracting, and transforming the data to a useable format.
There are electronic records that may be obtained from other sources such as Web pages, e-mail messages, or digital bank records. The auditors will follow rules similar to that for hard copy documents they receive. These records are reviewed to see if they are useable for substantiation. However, there are differences that auditors are trained to identify, for example, electronic records that have been improperly changed or manipulated.
Once electronic documents are presented, the auditor needs to make a determination as to the credibility of the data provided and decide whether it is appropriate and or adequate in support of the issues being reviewed. Sometimes even when the auditor's computer can read the electronic files, the files are not adequate due to the lack of detail. This usually occurs when the transactions were recorded in the software program or due to the improper manipulation of the electronic records and or the lack of supporting detail at the time of the examination.
Now is probably a suitable time to bring in some authority. As noted on slide number ten, the Internal Revenue Code Section 6001 and the related Income Tax Regulations under Section 1.6001-1 generally provide that everyone must keep adequate records.
Slide 11 references Revenue Procedure 9825, also called Rev. Proc. 9825, which prescribes requirements that the Internal Revenue Service considers essential in cases where your records are maintained within an automatic data processing system. The Internal Revenue Code and various revenue rulings and procedures also state that electronic records are subject to the same retention requirements as paper records.
Revenue Procedure 9825 Section 11.01 Hard Copy Records provides that the provision of this revenue procedure do not relieve you of the responsibility to retain hard copy records that are created or received in the ordinary course of business as required by existing law and regulations. Hard copy books and records or computerized books and records may be imaged to an electronic storage media, for example, an optical disk, an external hard drive, etc.
Some small businesses are exempt from furnishing electronic records under Rev. Proc. 9825. This exception applies to businesses with assets of less than $10 million. Businesses with assets of less than $10 million are not required to maintain new records in electronic format. However, they must be able to provide all of their records in hard copy. If a portion of their records is not in hard copy, the IRS can request their records in electronic format.
In most cases, the law does not require any special kind of records. In other words, you are not required to keep a specific general ledger or special accounting work papers. However, some items do have a higher standard for recordkeeping.
We can take a little time to discuss some common specific types of records, as illustrated by slide number 12. I will begin with gross receipts. It is always best to keep a list of gross income receipts source. This can be kept in a notebook or entered into an accounting program. When receipts are deposited into a bank account, the bank deposit slips and copies of all checks deposited should be maintained as well. This will be the case for most businesses.
In addition to the bank deposit information, additional items should be maintained to allow an accurate computation of gross receipts. These may include cash register tapes, can be matched to the bank information and will show how much of the business cash is deposited to the bank account; receipt books, the actual receipts of money in connection with the sale are recorded and can be tied to the sales record. This can partially verify gross receipt in connection with copies of deposited checks and deposit slips. Sales invoices provide the detail of the sales and can verify certain gross receipts. Credit card slips can provide details of the sales made with the credit card and will also verify certain gross receipts in connection with sales invoices. Forms 1099 can verify certain types of taxable income and could establish the accuracy of the bank deposits.
Slide number 13 addresses purchases and expenses. Supporting documents should include the amount paid and verify that the amount was for a business purchase. Purchases can usually be documented with the purchase invoice from the vendor plus a cancelled check, credit card sales slip, or cash register receipt.
As we move to slide number 14, you'll find another example, charitable contributions. A charitable contribution is deductible only if confirmed in accordance with the substantiation requirements. Depending on the amount, the donee generally must furnish the donor with written disclosure of the deductible portion of the total contribution. For monetary contributions exceeding $250, for example tithing, the donee must furnish the donor with written acknowledgement of the amount of the contribution. The written acknowledgement must be provided to the donor before the tax return is prepared. For contributions of property valued in excess of $5,000, an appraisal is required.
The charitable contribution recordkeeping requirements are not met by maintaining some other kind of written records such as your own calculations on a slip of paper. A charitable contribution is not a business expense, and is deductible on the Schedule A as an itemized deduction.
Continuing on with slide number 14, which also lists other common business expenses such as travel, transportation, entertainment, and gifts, you may not use estimates or approximations when determining the deductions for these business expenses. To verify expenses related to business travel, use of a vehicle, entertainment, or gifts, all of the following must be provided: The amount of each separate expense such as each element of a trip. For example, the airfare, the taxi, the hotel. The date including when a business trip begins and ends, the number of days spent on business, and in the case of a vehicle expenses, each time a personal vehicle is used for business. The description and addresses of the destination or event and a description of the gift given. An explanation of the business benefit gained, in other words, the business purpose of the expense.
Moving on to employment taxes on slide number 15. To fulfill the record-keeping requirement, you must keep the names, addresses, and identification numbers, the TIN for each individual who works for you or performs services and receives payment. The amounts and dates of each payment for wages, pension payments, tips, the fair market value of wages paid, bartering, and any fringe benefits provided must be recorded.
Next we turn to recordkeeping requirements for assets, which is summarized on slide number 16. Property used in a business must be substantiated by maintaining records that show when and how the property was acquired, the purchase price, and how the property is used. You need this information to compute the annual depreciation and the gain or loss when the property is sold. All of the annual depreciation schedules must be kept. Even if the asset is fully depreciated, it should remain on the depreciation schedule until disposal of the asset.
Although slide number 17 is relatively short, How to Maintain Good Books and Records, it is a broad topic. Generally, you should use the method that works best for you. Although the sophistication of records and the way the books and records may vary, the purpose does not. Income and expense items should be listed and summarized in an organized manner. The list should indicate what was received, from whom it was received, and the business purpose. The record summary should have totals that tie to the tax return. You should strive to keep itemized recordation. Details of the elements of an expense that is recorded at the time of its occurrence is usually more valuable than a statement prepared later when there may be a lack of accurate recall.
Slide number 18 asks the question, Who's responsible for the books and records? The tax payer/business owner is responsible for maintaining adequate books and records. However, when a bookkeeper is employed or a paid preparer is involved, the scope of his or her involvement is also important. What was the paid preparer's roll? For instance, was the preparer also involved in any of the book keeping activities or did he or she receive only limited information such as financial statements that was aggregated and transferred to the tax return?
Now I will turn it back over to Diana for discussion on the basic examination procedures.
D. Stewart Now, in order to help you understand the reason you keep these good books and records, I want to discuss some basic examination procedures. As slide 19 points out, most tax returns are accepted as filed. When an examination is needed, there are various types of audits. Correspondence, office, and field examinations are three types.
A correspondence audit is just that. A letter is sent to you requesting an explanation of an item or items on the return. You should respond to the request as instructed in that letter.
Individual returns including small Schedule C businesses are among those that are selected for office examinations. The initial appointment in an office examination can be expected to last two to four hours. Field examinations may address more business issues and generally include multiple day appointments.
Slide 20 addresses a few common questions you may have during the audit. The first, where will the examination be conducted? An office examination will take place in the Internal Revenue Service office and a field examination will generally take place where the books and records are maintained. This is usually at the place of business or the residence if the business operates from the home.
What records are needed? For both field and office examinations, the auditor will provide you with an information document request, a Form 4564, which lists the records and other items needed at the scheduled meeting.
Slide 21 directs you to a website where you will find a video presentation titled Your Guide to an IRS Audit. This video was launched during August 2010 and it follows three hypothetical small business taxpayers through and audit from notification to closing. The video will provide valuable information that will assist you in preparing for an audit. It illustrates key points and answers frequently asked questions about the audit process.
Lesson four of that video series is titled How Do You Prepare Your Records for the Audit? The lesson provides comprehensive information that will assist you in preparing for your IRS examination. You'll find a list of the lessons contained in the video on resource slide number 28 at the end of this presentation.
Another important question is how long should books and records be kept? As you'll see on slide 22, it depends on the facts and circumstances. The IRS generally has three years from the filing date to examine a tax return, and this is called the statute of limitations. If you discover and error, you generally must file your claim for a credit or refund within three years after the date you filed your original return or within two years after the date you paid the tax, whichever is later.
If there is a 25 percent income omission, the statute of limitations is six years, and in the case of a non-filed return, the statute of limitations is not running. There is no statute of limitations for false or fraudulent returns filed with the intent to evade taxes. Further, the statute of limitations maybe extended by agreement between the taxpayer and the IRS. Generally, tax records must be kept at least until the statute of limitations expires for the tax return on which any of those items of income, deductions, or credits appear.
The type of items being documented and expense may also have a bearing on the length of time that the records should be maintained. Source records such as checks, receipts, and a proof of business purpose should be kept at least three years. Maintaining records for the period required will assist you when you discover a mistake on your return and need to file an amended return or claim for refund. The amended return or claim for refund may be filed as long as such claim for a refund is not time barred.
Sometimes, as you can see on slide 23, you keep the records until the deduction is no longer claimed. All employment tax records are kept for at least four years, and these should be available for IRS review.
In the case of assets, records showing business depreciation should be kept until the asset is sold or otherwise removed from the business, and this can be up to 39 years in the case of some real estate. All purchase contracts and depreciation schedules must be retained until the period of limitations expires for the years the property is disposed of in a taxable disposition. If the asset was acquired in a nontaxable exchange, then you must retain all records until the period of limitations has expired for the new property. This includes ownership and partnership, S corporations, and C corporations.
IRA contributions - these records should be kept permanently. The tax on some IRA contributions is deferred until the money is withdrawn, while contributions to other types of IRAs are included in taxable income in the year of contribution. So detailed records are needed to determine whether or not withdrawals from IRAs are taxable at the time of the withdrawal. If nondeductible contributions have been made to an IRA, the required records will verify that the amounts withdrawn were previously included in income and are therefore not taxable at the time of your withdrawal.
Form 8606, titled Nondeductible IRA, can be used to track retirement plan taxes. This form is only filed in the year all deductible contributions are made so it calculates the taxable basis of an IRA. Keep all Forms 8606 until all money is withdrawn from your IRA account.
Brokerage statements - keep these records until the limitation period is expired for the year in which the securities are sold. Keep confirmation reports of stock purchases and sales, including the execution price and trade dates. When a security is sold, both the statements showing the original purchase and the later statement showing the sale will be needed to calculate the capital gains or losses.
Improvements to a residence must be documented. Keep receipts for major home improvements until you sell the house. Keep all records documenting the purchase price and the cost of all permanent improvements, for example, remodeling or additions and installations. Improvements made on a residence, as well as expenses in selling it, can be added to the original purchase price or cost basis reducing your capital gain.
Net operating loss deductions are also called NOLs. Depending on the year of the return being audited, generally NOLs may by carried back two years and carried forward up to 20 years. Note that older tax years that are ordinarily closed by the statute of limitations may be examined to determine the correctness of a NOL claimed against the income of a current and open year. When claiming a net operating loss, you should keep all records of income and expenses not only for the loss year, but also for all appropriate years when the loss is carried back or carried forward. These records should be kept until the statute of limitations has expired on the last tax return claiming the loss.
There aren't just federal recordkeeping laws. Everyone needs to be aware of not only the federal laws for keeping records, but they should also be aware of the state laws applicable to their recordkeeping requirements. In some states, for some situations, there are no statues of limitations.
Slides number 24 and number 25 will provide an overview of what to expect at an IRS examination. Both sides will have some expectations. As unlikely as you think it is, remember that auditor is only human. We will try to forge a working relationship from the first contact. You should treat the auditor as you would any business client or associate.
Number one, avoid delay. If possible, avoid delaying the examination. If the delay is warranted because the records are not in good order, be honest with the auditor, most of the time the auditor can suggest ways to reconstruct or verify the transactions. You should organize the records because neatness counts. If the records have order, it will expedite the examination. A representative needs to be familiar with the records and should be able to explain typical transactions such as the steps in sales transactions or the steps in a purchase transaction. It's not acceptable to provide unorganized boxes of records and this will delay the examination because the auditor will require you to sort those records.
Prior to your scheduled meeting, make sure you've thoroughly reviewed the tax return. Be ready to explain how amounts on the tax return were calculated. Some amounts entered will need to be reconciled by the auditor, so if questioned, you and your representative must make sure you understand the entries made.
You should also be prepared for the auditor to test the system. The auditor will need to test your recordkeeping system so make sure it can be explained sufficiently. Random invoices will be traced and reconciled to show, for example, how income is recorded including journalizing, posting to ledgers, and summarization. Testing helps determine that the books and records are reliable.
Bring all relevant work papers. When two or more types of items are combined, for example, liability, auto, and life insurance expenses, bring the worksheet showing the breakdown of the individual payments for each type of insurance. Whenever calculations are made, bring the work papers that show that calculation and this will help the examination progress quickly and end sooner.
Our current topics continued on slide 25, and we all know that mistakes happen. So if a mistake was made, point it out as soon as possible. This will avoid time consuming delays for you and for the auditor. For any representative attending today, please note that the current Circular 230 has a short and concise statement on this subject.
The taxpayer should be available. Sometimes the representative cannot explain the book keeping system or explain actions of a different accountant. In these instances, the taxpayer's knowledge can speed up the examination process.
Review the year before and the year after. The auditors are required to expect the preceding and subsequent year's tax return to check for consistency and compliance along with any related returns. When corrections and adjustments are made to the year-end examination, examination may be expanded to include the prior subsequent year to make similar corrections.
What if additional information is needed? If additional information is required, and the documents are not readily available, a follow-up appointment will be scheduled and an information document request, or an IDR, will be issued listing the items needed to complete the examination. It's usually at this point that the mutual commitment date, or MCD, will be set between the auditor, representative, and the tax payer. Topics of the MCD discussion will include responsibilities and expectations of all the parties and will specify time frames to review the additional documentation requested.
Now for the conclusion of the audit, the audit is usually concluded with a closing meeting between you, the representative, and the auditor. At this time, the auditor will report the findings. If there are adjustments, a report of the additional tax due, or in some cases, a refund due, will be presented to you and the representative. You'll be given time to review the report and determine if you agree with the auditor's findings. If you agree with the findings, you'll be asked to sign and return the agreement to the auditor, and if possible, pay the tax due. If you don't agree, you may decide to appeal the auditor's findings. You'll be given the opportunity to present your position on the adjustments to an unrelated third party who will review the adjustments and propose a settlement to the audit.
At the beginning of the audit, probably during the initial interview, the auditor will discuss with you the appeal rights. At the time the report is presented to you, the auditor will provide a copy of publication 5 titled, Appeal Rights in Preparation of Protest for Unagreed Cases, which explains in detail the entire appeals process.
In conclusion, I'd like to point out the information contained in slides number 26, 27 and 28. These three slides provide a list of additional IRS resources available on recordkeeping and the IRS audit process. At your convenience, please use the link on slide 28 to access the IRS video portal. There you'll find several short videos on recordkeeping and a special correspondence audit video clip.
This concludes this portion of the recordkeeping requirements presentation. I'll now turn the session back over to the moderator.
A. Gregerson Thank you, Diana and Dave, for your presentation. Before we open the question and answer session today, I would like to remind you to follow the operator's instructions for asking questions over the phone. Please be aware that no questions will be accepted after the Q&A portion of this event. Also, please do not ask about account or client issues as this is considered a public forum. We will not be able to respond to questions that are not directly related to today's presentation. Lastly, please direct your technical questions with regard to submission of electronic records to the auditors assigned to an open case. We will now begin taking questions.
Moderator The first question comes from the line of Carolyn Warfield.
C. Warfield I wanted to ask the question about slide 11. You said some exempt assets with less than $10 million. Would you repeat that again?
D. Tracewell From slide 11, I was making reference to the Revenue Procedure 9825. Some small businesses are exempt from furnishing electronic records under Rev. Proc. 9825. This exception applies to business with assets of less than $10 million.
C. Warfield Did you say on 23 how long to keep records? You've got brokerage statements until the limitation period is expired and I didn't understand what the limitations of it is.
D. Stewart On the brokerage statement, you should keep those as long as the statute of limitations is open on the return where you report that transaction. For example, if you had a sale of stock and you have a brokerage statement showing the purchase and then a separate statement showing the sale of that stock, you need to keep that documentation until the statute of limitations has expired on that return where you reported that capital gain.
Moderator The next question comes from Randy Warshawsky.
R. Warshawsky My question is, since we're now able to or have to give the IRS records electronically, does the IRS now have to accept back up of documents in an audit via PDF on a CD?
D. Tracewell Could you repeat your question?
R. Warshawsky Well, the question is, the IRS now through the 98-25, they're saying that we have to submit documents electronically, basically QuickBooks files etc. My question is, I've had auditors in the past that do not want to accept the documentation being supplied for an audit on a CD via PDF. They want hard copies, and I'm refusing to supply hard copies.
D. Tracewell Generally, the IRS will accept electronic records in electronic format. I mean, there could be instances or there may be instances where the original, let's say hard copy invoice, could be requested.
R. Warshawsky Right. So through Rev. Proc. 9825 we can use it both ways. The IRS, using it against us for electronic media but we can use it to represent that we can supply our media to you via electronic as well.
D. Tracewell Well, that question is kind of loaded because sometimes it would depend on the asset size of the entity that we're discussing. If it is an entity with assets over $10 million there are certain requirements they have to meet with electronic records. If it's a taxpayer less than $10 million in assets, the Rev. Proc. doesn't require them to keep their records in electronic format. But if they keep it in electronic format, the IRS may ask for the electronic format records as well as the hard copy records.
Moderator The next question comes from Marie Holland.
M. Holland My question is, with all the documentation that companies have to keep these days, they're loaded by boxes and boxes of that, can they scan them to a CD under a PDF and secure them as was an original document and will that suffice in case of an audit?
D. Tracewell Again, it would depend on the type of the original document that started off with the scanning of the process. It it's a hard copy invoice, it may be scanned in, but it's still going to be required to maintain that hard copy. The IRS may not necessarily request the hard copy. The scanned image, if it was provided to the tax auditor, it may suffice for the documentation.
M. Holland Okay, so if they have a scanned copy with that invoice and they have the check attached to that will that be Ð
D. Tracewell Again, that vary a little bit from auditor to auditor, but that should suffice generally. Again, Diana, you got any more input?
D. Stewart I know it can be burdensome and cumbersome sometimes to keep those documents that you have scanned in, but a lot of examiners in many instances will need to trace the actual entries back to the source document. Again, as they said, generally those scanned documents maybe sufficient, but in some cases, they may not and they may actually request that original document.
M. Holland I'm also a bookkeeper and we scan every receipt that our clients give us onto a CD and we secure it as it was the original document because a lot of receipts fade. If you go to the store and you get a receipt from the registers or something like that, the receipts are so faded two or three years down the road, I don't see how the original receipt would do justice to the IRS for them or businesses to approve that expense since the receipts do fade because they're on thermal paper.
D. Stewart Right. We have run across that problem before. You know, the good thing about scanning those in is that you can provide that total record to the auditor and they can use that as a sampling instrument if they want to just to look at certain invoices and things that they can request a source document by looking at what you have on your CD, but again, I'm not going to recommend that anybody destroy those original documents.
Moderator Moving on to Pat Liles.
P. Liles I have a question that's come up. My employer is wanting to streamline the accounts payable system here. He wants to take and have the invoice matched with the purchase order and/or receiver and have it entered into the computer and then filed immediately into the paid file saying that the computer has a list of the checks that are to be prepared that week and I'm disagreeing with that. His final thing is that the check stubs from the payments will be filed elsewhere, if at all. Is this any kind of proper recordkeeping?
D. Stewart As we talked about to substantiate your deduction, you're going to have to have proof of payment as well as proof of the item, what it is, what it was used for in the business. So I'm not real sure if I understand your question, but you have to ensure that you keep those types of things that you can pull together and show that not only did you pay for an item but it was a business item.
We stated during the presentation, everybody has a little different method of recordkeeping, we don't advocate any particular method or any particular software. We only tell you what we can accept at this time. But any method that you choose that meets those substantiation requirements to verify payment, to verity the business purpose, what the expense was for, or where the income came from, then it's up to you to determine how you keep those records as long as you can provide those when requested.
P. Liles Well, after 50 years of experience, I have never heard of this type of a method. It's like throwing all of the information into the wind and hoping someday it lands on your desk. I just wanted to verify if it would be okay for you to walk in and do an audit and find these things in that shape.
D. Stewart Well, the examiner would let you know what types of records they needed and then it's going to be the responsibility of the tax payer, the representative, the preparer, whoever they designate to prepare those items for the audit. Again, I'm not advocating any particular system, I'm just telling you what you should expect. How you should prepare for the examination.
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Moderator That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect.