Bookkeeping
Automated bookkeeping: what software does, what it doesn't, and the IRS rules for electronic books
What bookkeeping automation handles and what still needs records and review: IRS rules for computerized records (Rev. Proc. 98-25 and 97-22), what examiners ask for, how long to keep records, and what BLS says about automation and bookkeepers.
Prepared by Aldro Accounting · Updated · Sources checked
The quick answer
Automated bookkeeping uses accounting software to record and process transactions, which the IRS calls an automatic data processing (ADP) system when records are processed by other than manual methods. Automation doesn't change the recordkeeping rules: IRS Publication 583 says computerized records must reconcile with your books and return, identify the underlying source documents, and come with a description of the system and its controls.
What automated bookkeeping is
The IRS Internal Revenue Manual defines accounting software as application software that records and processes accounting transactions with functional modules, such as accounts payable, accounts receivable, general journals and other ledgers. It defines financial software as software designed to automate, assist and store financial information and to handle the analysis, management, processing and storage of financial processes, records and transactions.
When a business runs its records this way, the IRS calls it an ADP system: an accounting or financial system that processes all or part of a taxpayer's transactions, records or data by other than manual methods.
IRS Publication 583 describes recordkeeping software packages as very helpful and relatively easy to use, requiring very little knowledge of bookkeeping and accounting. It also says a double-entry system, which posts journal entries to ledger accounts, has built-in checks and balances to assure accuracy and control.
What automation does
The U.S. Bureau of Labor Statistics lists the routine duties of bookkeeping, accounting and auditing clerks. These are the tasks software now handles or speeds up:
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| Measure | Figure |
|---|---|
| Median pay, bookkeeping, accounting and auditing clerks (May 2025) | $50,670 per year, $24.36 per hour |
| Jobs in 2025 | 1,532,400 |
| Projected change, 2025 to 2035 | -6% (-85,600 jobs) |
| Openings per year, on average | About 144,100 |
- Entering (posting) financial transactions into accounting software
- Assigning costs (debits) and income (credits) to the right account
- Producing reports such as balance sheets, income statements and totals by account
- Checking figures, postings and reports for accuracy
- Reconciling records and noting differences
Why BLS expects fewer bookkeeping clerks
BLS says technological change is expected to reduce demand for these workers because software innovations have automated many of their tasks, so the same work can be done with fewer people.
It also expects the work that remains to change. With more routine tasks automated, BLS says clerks are expected to take on a more analytical and advisory role, such as reviewing clients' books and pointing out areas for efficiency gains, rather than entering data by hand.
What automation doesn't do
It doesn't replace source documents. Publication 583 says purchases, sales, payroll and other transactions generate supporting documents, such as sales slips, paid bills, invoices, receipts, deposit slips and canceled checks, and that you should keep them because they support the entries in your books and on your return. The IRS manual says taxpayers remain responsible for keeping hardcopy records created or received in the ordinary course of business, unless they are kept on microfilm or in an electronic storage system that meets Rev. Proc. 97-22.
It doesn't do the monthly check for you. Publication 583 says to reconcile your checking account each month, so that the bank statement, your checkbook and your books agree, and to keep the business account separate from your personal account.
It doesn't make records reliable on its own. The IRS manual says examiners determine the reliability of books and records regardless of how sophisticated the recordkeeping method is, and that electronic records are in general considered less reliable than paper because they can be manipulated more easily.
It doesn't bridge books and the tax return. For corporations, entries on Schedule M-1, which reconciles book income to return income, aren't part of the double-entry system. The IRS manual notes normal accounting controls don't exist there, so errors can be frequent.
IRS rules for computerized and electronic records
Publication 583 says that if you use a computerized system, you must be able to produce legible records that support the entries on your return and your correct tax liability. The machine-sensible records must reconcile with your books and return and give enough detail to identify the underlying source documents. You must also keep a complete description of the computerized part of your recordkeeping system showing the following.
- Functions performed as the data flows through the system
- Controls used to ensure accurate and reliable processing
- Controls used to prevent unauthorized addition, alteration or deletion of retained records
- Charts of accounts and detailed account descriptions
The $10 million exemption and electronic storage
Rev. Rul. 71-20 makes machine-sensible data in an ADP system records under IRC 6001. Rev. Proc. 98-25 exempts small business taxpayers with assets of less than $10 million at the end of the tax year from the record retention requirements of Rev. Rul. 71-20 and Rev. Proc. 98-25.
The exemption doesn't apply if information required by IRC 6001 isn't in the hardcopy books but is in machine-sensible records, if machine-sensible records were used for computations that can't reasonably be verified without a computer, such as LIFO inventories, or if the IRS notifies the taxpayer that machine-sensible records must be kept.
Going paperless has its own rule. Publication 583 says an electronic storage system must index, store, preserve, retrieve and reproduce records in legible format, and original paper records may be destroyed only after the system has been tested to show it reproduces them in compliance with IRS requirements. Under Rev. Proc. 97-22, the system needs reasonable controls against unauthorized changes, an inspection and quality assurance program, and an indexing system. The IRS manual says a system that fails these requirements is out of compliance with IRC 6001, and a Notice of Inadequate Records should be issued.
What examiners ask for
The IRS manual tells examiners to ask about accounting software in the initial conversation. If a taxpayer uses electronic records, the examiner should request them early, along with the user names and passwords needed to read them, using Form 4564, Information Document Request. If records aren't provided voluntarily, the examiner should consider a summons to the taxpayer or a third party, such as a preparer or financial institution.
The taxpayer must provide the resources needed to process machine-sensible records at the time of the exam, such as hardware, software, terminal access, computer time and personnel.
E-commerce and internet activity must be audited as part of the minimum income probes for all business returns, including limited scope audits. The manual says evidence of unreported e-business activity can be found by reconciling daily credit card receipts and other electronic funds transfers to bank deposits. That is the same reconciliation good automated books should already show.
How long to keep the records
Publication 583 says to keep records that support an item of income or deduction until the period of limitations for that return runs out. The same retention rules apply to records kept in software.
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| If you | The period is |
|---|---|
| Owe additional tax and none of the cases below apply | 3 years |
| Don't report income you should, and it's more than 25% of the gross income on the return | 6 years |
| File a fraudulent return | Not limited |
| Don't file a return | Not limited |
| File a claim for credit or refund after filing | Later of 3 years or 2 years after the tax was paid |
| Claim a loss from worthless securities or a bad debt deduction | 7 years |
Automation plus review
The pattern in the IRS rules is the same throughout: software can post and sort transactions, but the books still have to reconcile, tie to source documents and carry documented controls. Aldro's bookkeeping includes monthly reconciliation and statements across unlimited bank and card accounts, and the same books feed the yearly return our team prepares and files.
Common questions
Can I throw away paper receipts if my bookkeeping is automated?
Only if they are kept in an electronic storage system that meets IRS requirements. The IRS manual says hardcopy records must otherwise be kept, and Publication 583 says originals may be destroyed only after the electronic system has been tested to show it reproduces them in compliance with IRS requirements.
Can the IRS ask for my accounting software file and password?
Yes. The IRS manual tells examiners to request electronic records early in an exam, with the user names and passwords needed to read them, on Form 4564. A summons is an option if they aren't provided voluntarily.
Do small businesses have to follow the IRS rules for machine-sensible records?
Rev. Proc. 98-25 exempts businesses with less than $10 million of assets at year end from its retention rules, unless required information exists only in machine-sensible records, computer-only computations such as LIFO are involved, or the IRS gives notice that they must be kept.
Will automation replace bookkeepers?
BLS projects bookkeeping, accounting and auditing clerk jobs to fall 6% from 2025 to 2035 as software automates routine tasks, with about 144,100 openings a year still expected and a shift toward analysis and advice.
How often should automated books be reconciled?
IRS Publication 583 says to reconcile your checking account each month so the bank statement, checkbook and books agree.
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Sources
- IRS: IRM 4.33.1 · checked October 31, 2026
- IRS: IRM 4.10.4, Examination of income · checked October 31, 2026
- BLS: Bookkeeping, accounting, and auditing clerks · checked October 31, 2026
- IRS: Publication 583, Starting a business and keeping records · checked October 31, 2026
This guide explains general rules from the sources listed. It isn’t tax advice for your situation.