Rev. Proc. 80-42

Section 1. Purpose

.01 The purpose of this revenue procedure is to set forth guidelines specifying the basic record requirements that the Internal Revenue Service considers to be essential in cases where a taxpayer's records are maintained within an automatic data processing (ADP) system. References here to ADP systems include all accounting systems which process all or part of a taxpayer's transactions, records, or data by other than manual methods.

.02 The technology of ADP is evolving rapidly; new methods and techniques are constantly being devised and adopted. Accordingly, the five points set forth in section 4 of this revenue procedure are not intended to restrict or prevent taxpayers from obtaining the maximum benefits of ADP provided the appropriate information is present or can be produced by the system. These guidelines will be modified and admended as the need indicates to keep pace with developments in ADP.

Sec. 2. Background

The inherent nature of ADP is such that it may not be possible to trace transactions from source documents to end results or to reconstruct a given account unless the system is designed to provide audit trails. Taxpayers already using ADP or contemplating its use have requested information concerning the types of records that should be developed and maintained in order to meet the requirements of section 4997 of the Internal Revenue Code and the corresponding regulations. This section of the Code reads in part as follows:

Each taxpayer liable for the windfall profit tax, each partnership, trust, or estate producing domestic crude oil, each purchaser of domestic crude oil, and each operator of a well from which domestic crude oil was produced shall keep such records, make such returns, and furnish such information with respect to such oil as the Secretary may by regulations prescribe.

Sec. 3. Objectives

Modern machine accounting systems are capable of recording business transactions much more rapidly and with greater accuracy than manual systems, and they are capable of retaining and producing vast amounts of data. The ability to produce in legible form the data necessary to determine, at a later date, whether or not the correct tax liability has been reported must be carefully considered in designing and programming a machine system. This factor may add to the complexity of the system and require additional cost, but this cost may be negligible in comparision to the expense that may be incurred at a later date if the system cannot practically and readily provide the information needed to support and substantiate the accuracy of the previously reported tax liability.

Sec. 4. ADP Record Guidelines

.01 ADP accounting systems will vary, just as manual systems vary, from taxpayer to taxpayer. However, the procedures built into a computer's accounting program must include a method of producing from the punched cards or tapes visible and legible records which will provide the necessary information for the verification of the taxpayer's tax liability.

.02 In determining the adequacy of records maintained with an ADP system, the Service will consider as acceptable those systems that comply with the guidelines for record requirements as follows:

1 General and subsidiary books of account. A general ledger, with source references, should be written out to coincide with financial reports for tax reporting periods. In cases where subsidiary ledgers are used to support the general ledger accounts, the subsidiary ledgers should also be written out periodically.

2 Supporting documents and audit trail. The audit trail should be designed so that the details underlying the summary accounting data, such as invoices and vouchers, may be identified and made available to the Service upon request.

3 Recorded or reconstructible data. The records must provide the opportunity to trace any transaction back to the original source or forward to a final total. If printouts are not made of transactions at the time they are processed, then the system must have the ability to reconstruct these transactions.

4 Data storage media. Adequate record retention facilities must be available for storing tapes and printouts as well as all applicable supporting documents. These records must be retained in accordance with the provisions of the Code and the regulations prescribed thereunder.

5 Program documentation. A description of the ADP portion of the accounting system should be available. The statements and illustrations as to the scope of operations should be sufficiently detailed to indicate (a) the application being performed, (b) the procedures employed in each application (which, for example, might be supported by flow charts, block diagrams or other satisfactory descriptions of input or output procedures), and (c) the controls used to insure accurate and reliable processing. Important changes, together with their effective dates, should be noted in order to preserve an accurate chronological record.

Sec. 5. Comments or Inquiries

Comments or inquiries relating to this revenue procedure should be addressed to the Assistant Commissioner (Compliance), Attention: CP:E, Washington, D.C., 20224.

Sec. 6. Effective Date

This revenue procedure is effective October 14, 1980, the date of its publication.

¹ Also released in News Release IR-80-96 dated September 23, 1980.