Rev. Rul. 81-205

ISSUE

Can the addition to tax under section 6653(a) of the Internal Revenue Code and the criminal penalty under section 7203 be applied for failure to retain machine-sensible tax records as required by Rev. Rul. 71-20, 1971-1 C.B. 392.

FACTS

Rev. Rul. 71-20 holds that punched cards, magnetic tapes, disks, and other machine-sensible data media used for recording, consolidating, and summarizing accounting transactions and records within a taxpayer's automatic data processing system and records within a taxpayer's automatic data processing system are records within the meaning of section 6001 of the Code and section 1.6001-1 of the Income Tax Regulations, and are required to be retained so long as the contents may become material in the administration of any internal revenue law.

LAW AND ANALYSIS

Section 6001 of the Code provides that every person liable for any tax, or for the collection of any tax, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may prescribe.

Under paragraphs (d) and (e) of section 1.6001-1 of the regulations, the district director may require any person, by notice served upon them, to keep such specific records available for inspection by the Service, and to retain such records so long as the contents may be material to the administration of any internal revenue law.

Section 7602 of the Code authorizes the Secretary to examine any books, papers, records, or other data which may be relevant or material, and to summon the person liable for the tax, or who has custody of the books relating to the business of the person liable for the tax to appear before the Secretary at the time and place named and to produce such records for the purpose of ascertaining the correctness of any return, making a return where none has been made, or determining the liability of any person for any internal revenue tax, or collecting such liability.

Section 6653(a) of the Code provides for an addition to the tax of 5 percent of the amount of any underpayment of tax resulting from negligence or intentional disregard of rules and regulations (but without intent to defraud).

Section 7203 of the Code provides that any person who willfully fails to keep records or supply information at the time or times required by law or regulations shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction, shall be fined not more than $10,000, or imprisoned not more than one year, or both, together with the costs of prosecution.

The position set forth in Rev. Rul. 71-20 was sustained, in effect, in United States v. Davey, 543 F.2d 996 (2d Cir. 1976). The court ordered unconditional enforcement of the Service's summons for the production of computer tape records for the taxable years in question. In so doing the court stated: "In this era of developing information-storage technology there is no conceivable reason to adopt a construction that would immunize companies with computer-based record-keeping systems from IRS scrutiny."

Enforcement of the provisions of Rev. Rul. 71-20 is normally carried out through the District Director's notice to taxpayers to retain records under paragraphs (d) and (e) of section 1.6001-1 of the regulations, and the summons to produce records under section 7602 of the Code and section 301.7602-1 of the Regulations on Procedure and Administration.

When any part of a deficiency is attributable to the fact that a taxpayer has refused or neglected to retain machine-sensible records as required by Rev. Rul. 71-20, the civil penalty under section 6653(a) of the Code may be applicable. Furthermore, a taxpayer who disposes of such records will be in violation of the taxpayer's known legal duty to retain records as required by Rev. Rul. 71-20, and the criminal penalty under section 7203 may also be applicable.

HOLDING

The addition to tax under section 6653(a) of the Code, a civil penalty, may be applicable for failure to retain machine-sensible tax records as required by Rev. Rul. 71-20. The criminal penalty under section 7203 may also be applicable. The Internal Revenue Service has instructed Revenue Agents to examine cases in which such records were not retained, and to assert these penalties in appropriate cases.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 71-20 is amplified.