4.47.2. CAS Technical and Procedural Information

(1) All systems and peripheral equipment shall be kept in a controlled area when possible, which can be monitored by authorized users during working hours and locked after hours.

(2) Whenever a non-IRS person, such as a maintenance service employee, enters the controlled area, at least one IRS employee knowledgeable of the system will accompany the person and monitor his or her activity.

(3) When transferring taxpayer data from digital storage devices that will be running after hours and not in a controlled area, the digital storage device must be properly secured to prevent loss.

(1) All users must be cleared to handle taxpayer data, but access to files will be limited, to those with a need to know.

(2) Taxpayer data which is on magnetic media will be afforded appropriate security and maintained or destroyed in accordance with established record retention policy. Printed data will be kept secured until distributed or destroyed. Hard copy to be destroyed should be shredded, placed in a shred bin maintained in office space, or otherwise rendered unreadable. Magnetic media containing taxpayer data which are to be discarded should be turned in to IT for proper disposal. Refer to IRM 10.5.1 Privacy Policy, Disposition and Destruction, for additional guidance on proper disposal of hard copy paper and electronic media.

(1) Backups of application files will be taken as frequently as is prudent for a particular site. A systems file backup and an application files backup will be stored away from the computer room so as to preclude total loss of data from a localized fire or other disaster. Original backups may be used for this purpose; duplicate backups are not required. All backups will be kept in a secured location.

(1) Sensitive data will be cleared from the screen upon "logoff" or leaving a terminal.

(2) Computer room(s) will be cleaned by janitorial service personnel only during working hours.

(1) CASs will conduct evaluations of taxpayer’s computerized accounting systems. Initial evaluations will only be conducted when requested by the taxpayer. Reevaluations may be initiated by the CAS territory manager at times other than during an examination, if deemed appropriate.

(2) Taxpayers whose records are processed by ADP service bureaus or time-sharing services are responsible for record retention the same as any other taxpayer.

(3) In most cases, the record evaluation will show that audit efficiency can be increased using machine-sensible records. Discussions should be held with taxpayers or their representatives to gain cooperation in the use of computer assisted audit techniques and taxpayer computer facilities. After the discussions are concluded, the taxpayer must be furnished with either a confirmation letter or a notice, depending on whether the taxpayer agrees to comply, setting forth the specific record retention requirements resulting from the evaluation.

(4) The group manager, team manager and/or territory manager with responsibility for the case must concur with the provisions incorporated in the agreement or notification. All specialty team managers involved should also review and approve the list of records identified for retention. All concurrences are to be in writing.

(5) When an evaluation of a taxpayer’s records results in the need for changes to arrangements or record requirements previously agreed to, or set forth in a notification to the taxpayer, a new notification or agreement reflecting the changes or requirements will be issued.

(6) Internal controls affecting record retention are as follows:

1. The CAS should evaluate and document the system of internal controls used by the taxpayer to ensure that the records needed will actually be retained.

2. The taxpayer’s internal controls should be capable of ensuring that records are retained in spite of changes that may occur in tax department or data processing department personnel, to the computerized accounting system, or to the computer files management system.

3. Such a system will typically provide a regular report to the company official responsible for the record retention limitation agreement identifying the records actually retained and the periods covered.

4. Serious deficiencies detected in the taxpayer’s system of internal controls must be discussed with the taxpayer. If the taxpayer fails to take corrective action within a reasonable period of time, consideration should be given to issuing a notification letter.

(7) The CAS will identify the audit trail and perform reconciliation between the tax return and the items being examined. At a minimum, the CAS will reconcile the tax return to the trial balance(s) at the tax return line level, not at a net/book income level. This procedure can be waived with consideration of examination team support needs and only with written approval of the CAS manager.

1. In situations where the taxpayer uses a tax preparation software package and/or has electronic data that contains the audit trail between the tax return and the trial balance, the CAS should request this electronic data for use in reconciling each tax return line item to the corresponding trial balance accounts.

2. In situations where the revenue agent or team coordinator performs the reconciliation, the CAS should request copies of the reconciliation work papers and include them in the CAS case file.

(8) When the audit team requests detailed transactional information, the CAS should reconcile the details to the corresponding trial balance or other summary documentation unique to the requested detailed information.

(1) Evaluators should review examination historical files and consult with the examining agent, other team members, or specialists (engineer, financial products, cross border activities, tax law, economists, employment and excise), and the group or case manager to determine what records were used. The CAS should also review audit trails and record formats, and hold discussions with responsible officials, including representatives from the taxpayer’s data processing department.

(2) Taxpayers should be asked to identify files which they deem appropriate not to retain.

(3) Certain printed reports produced by a taxpayer are often critical to an examination and continually used by examiners. Since the taxpayer may change company policy and no longer produce a key report in the same format or media, consideration should be given to retaining machine-sensible records, which would permit the re-creation of such reports.

(1) The following is a brief outline of some basic information useful in the evaluation of a taxpayer’s ADP system.

(1) When discussions with the taxpayer result in an agreement to retain machine-sensible records, and cooperate in the use of computer-assisted techniques, or to use alternative procedures acceptable to the IRS, a confirming letter will be issued to the taxpayer by the CAS territory manager setting forth what has been agreed to. This letter will be issued over the signature of the CAS territory manager.

(1) When a taxpayer, after the records have been evaluated by the IRS, is orally advised of record retention requirements but does not agree to comply or enter into an agreement, the CAS territory manager must issue a letter notifying the taxpayer that retention of the records specified therein is required. This letter is applicable only to those taxpayers whose records are acceptable under the guidelines in Rev. Proc. 98–25. Others will be handled under normal inadequate records procedures.

(2) This notice will also be issued in cases where the taxpayer’s willingness to comply with the terms of a signed record retention limitation agreement is seriously questioned. This may be evidenced by the taxpayer’s failure to implement adequate internal controls to ensure that records identified in the agreement will actually be retained.

(1) When it is determined that the accounting records processed by computer are not sufficiently voluminous or complex to warrant their retention in machine-sensible form, a letter will be issued to the taxpayer to confirm that a record evaluation has been made and that their present record retention practices will be adequate. This letter should be signed by the CAS team manager.

(2) When a taxpayer agrees to comply with the requirements of Rev. Proc. 98–25 and the taxpayer has adequate internal controls, a letter will be issued to the taxpayer to confirm that a record evaluation has been made and that their present record retention practices will be adequate. This letter should be signed by the CAS team manager.

(1) Consolidated Returns—One notice or confirmation letter to the common parent will serve as a notice to all members of the group. It may, of course, provide different retention requirements for different group members, as audit needs dictate.

(2) Large Corporate Compliance (LCC).

1. The LCC group to which the case is assigned will be responsible for the evaluation and determination of record retention requirements for all LCC components. A notice or confirmation letter to any member of a LCC will be issued upon the advice and direction of the CAS team manager. However, that LCC group may request an evaluation by a support CAS group. Requests for support evaluations should be coordinated through the CAS team manager and may require submission of a referral within SRS.

2. A copy of the notice or letter will be made a part of the case historical file.

(1) Taxpayers subject to the mandatory record retention requirements must retain all machine-sensible records generated by all automated data processing systems unless the CAS territory manager has consented to limit the retention to certain specific records.

(2) The limitation on machine-sensible records to be retained pursuant to a retention limitation agreement does not apply to subsidiary companies acquired, or to accounting and tax systems added, subsequent to the completion of the record evaluation or reevaluation upon which the agreement is based. All machine-sensible records produced by these companies or systems must be retained until such time as a reevaluation is conducted by the CAS territory manager.

(3) Unless otherwise specifically agreed to by the CAS territory manager, taxpayers are required to:

1. Periodically test records retained for Internal Revenue Service use.

2. Maintain system documentation relating to retained records.

3. Retain the capability to process the records at the time of an examination.

4. Provide evidence that the retained records reconcile to the books and the tax return.

5. If a new incompatible computer system is installed, either convert the records or have an arrangement with a third party to adequately process all records on a compatible system.

6. Notify the CAS territory manager if files identified for retention are lost or destroyed.

(1) The CAS territory manager may consent to limit the retention of records by entering into a record retention limitation agreement with a taxpayer. These agreements usually require the taxpayer to notify the CAS territory manager if changes are made to its ADP accounting systems or record formats that will affect the ability of the taxpayer to comply with the terms of the agreement.

(2) The intent of the notification provision is to permit a taxpayer to make changes to an ADP system without influencing the agreement, provided the content of the files specified in the agreement has not changed. Changes which add or rearrange fields within a data record will not be considered to have changed the substance of an agreement if all fields that were in the records covered by the agreement are retained. Under these circumstances, the files created by the revised system may be retained in lieu of those specified in the agreement. Notification is not required.

(3) A taxpayer who is unable to comply with the provisions of a record retention limitation agreement because of system changes has, in substance, created a new system. All records created by the replacement system must be retained until such time as a reevaluation is conducted by the CAS territory manager.

(1) As the information specialist to the audit team, the CAS is responsible for obtaining accurate and complete computerized records that meet the requirements of Rev. Proc. 98-25.

(2) Failure to comply with the provisions of Rev. Rul. 71–20 or Rev. Proc. 98–25 may result in the issuance of a Notice of Inadequate Records or the assertion of civil and/or criminal penalties. Refer to Rev. Proc. 98–25 and Rev. Rul. 81–205 for additional information.

(3) If records are lost, destroyed, damaged, incomplete or materially inaccurate, the following steps should be followed by the CAS to the extent necessary to correct the noncompliance.

1. Secure a letter from the taxpayer fully explaining the events leading to the situation, and any effort taken to recreate the file within a reasonable amount of time. This letter must be signed by a responsible officer of the company.

2. Issue a letter signed by the CAS territory manager stating the situation and putting the taxpayer on notice that any further problems can result in civil or criminal penalties.

3. Recommend to the case team manager the issuance of a Notice of Inadequate Records when the facts and taxpayer actions support such an issuance.

4. Recommend appropriate civil or criminal penalties provided by IRC 7203 if considered to be applicable. Form 2797, Referral Report for Potential Fraud Cases, must be submitted through channels to the Criminal Investigation Division. This recommendation will be made through the CAS team manager, case team manager, and case territory manager. The application of penalties is the responsibility of the case team manager.

(4) Careful consideration should be given to the issuance of a Notice of Inadequate Records pursuant to Section 12 of Rev. Proc. 98-25 when the required records are either incomplete or non-existent. The taxpayer should be offered the opportunity to explain the reason for the missing records and to reconstruct the records.

1. If the taxpayer provides the necessary records or delivers an alternative that is acceptable to the audit team, the events and actions should be documented in a memorandum to be included in the historical file.

2. If the taxpayer is unable or refuses to provide the needed information, serious consideration should be given by the CAS and CAS team manager to recommending the issuance of the Notice of Inadequate Records.

(5) It is the responsibility of the case manager to issue a Notice of Inadequate Records; however, it is the responsibility of the CAS and CAS team manager to make recommendations. If there is a disagreement between the team managers, the appropriate territory managers or other management officials should be involved to resolve the disagreement.