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IRS requirements for computerized accounting records

November 10, 2010

The Internal Revenue Service has certain requirements concerning the retention of computerized accounting records, which include all accounting and financial systems that process all or part of the dealer’s transactions, records, or data by other than manual methods.

Systems include microcomputer systems, data base management systems, and all systems using electronic data interchange. Punched cards, magnetic tapes, disks and other machine-sensible media used for recording, consolidating, and summarizing accounting transactions and records in a dealer’s computer system are records for purposes of IRS recordkeeping requirements. The IRS requires dealers to maintain these records for as long as their contents may be material in administering any tax law. This requirement applies to any record covered by a tax provision having unique or specific recordkeeping requirements.

The IRS requests access to these records when it examines a dealer’s tax return, so that the IRS agent can audit the records more efficiently by using the computer as an audit tool. The IRS specifies standards that must be met when a taxpayer maintains records using a computerized recordkeeping system. The standards vary for taxpayers with less than $10 million in assets, taxpayers with $10 million or more in assets, and taxpayers maintaining a DBMS.

The rules that apply to most dealers require that dealers retain all machine-sensible files generated by a computerized recordkeeping system that affect the dealer’s liability for any federal tax. Also, dealers are required to provide the IRS access to those records.

The IRS Motor Vehicle Technical Advisor issued an "Automotive Alert" dated Jan. 21, 2005, which discusses the requirements for dealerships, including a listing of files that may be requested by the IRS computer audit specialist. In addition to files generated by the dealership on its own computers, the list includes files generated by third-party service providers for areas such as LIFO computations, payroll, fixed assets, and corporate tax preparation.

The consequences for not complying with the recordkeeping rules include a possible negligence penalty, an inadequate records notice, and a subsequent IRS follow-up compliance examination. The inadequate records notice would be of concern to a publicly-held dealership because it would have to disclose the notice in the dealership’s financial statements; and to a privately-held dealer, who may have to disclose the notice when applying for financing.

Dealers should discuss the records retention requirements with their computer vendors and any other service provider related to any bookkeeping or tax service. The dealer should be especially concerned about the adequacy of the retained records when changing computer vendors or upgrading any computer system. The dealer needs to provide to the IRS not only the computerized records but also the software to run them.

This article is adapted from "A Dealer Guide to Federal Tax Issues" an online publication that is available free to NADA members through NADA University’s Resource Toolbox.