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EP Team Audit (EPTA) Program - Taxpayer Documentation Guide - What Records Should be Preserved for Access During an Audit?

Complimenting the responsibility to retain records is the responsibility to preserve the ability to access, retrieve and deliver those records in response to a request during audit. The most common obstacle the employer has to manage where the records exist in an electronic form is preserving access to the necessary systems to access, retrieve and deliver those records. 

Revenue Procedure 98-25 details the basic requirements that the IRS considers essential in cases where a taxpayer maintains records within an ADP system, and specifically includes employee plans matters.  All machine-sensible records required to be retained by Rev. Proc. 98-25 must be made available to the Service upon request and must be capable of being processed.  “Capable of being processed” is defined to mean, “…the ability to retrieve, manipulate, print on paper (hardcopy), and produce output on electronic media...” 

Similarly, Department of Labor regulations (29 C.F.R. § 2520.107-1(b)) provide for the maintenance and retention of records using electronic media, it is required that the electronic records be maintained in reasonable order and in a safe and accessible place, and in such manner as they may be readily inspected or examined (for example, the recordkeeping system should be capable of indexing, retaining, preserving, retrieving and reproducing the electronic records). 

Both Rev. Proc 98-25 and ERISA regulations are specific in directing employers as to how to maintain and retain its records using electronic media. Therefore, when an employer chooses to use electronic means by which to maintain and retain records, the employer has the duty to ensure those records can be accessed and retrieved, and that they are capable of producing such records to the IRS upon request. It is the taxpayer’s responsibility to work with its vendor to satisfy this requirement. If the taxpayer fails to comply with the applicable requirements, the IRS may issue a Notice of Inadequate Records and/or pursue other available legal remedies.