The Internal Revenue Service is entering the 21stcentury. They are starting to request backup copies from small business accounting software such as QuickBooks and Peachtree when they decide to audit a business. This represents a pretty dramatic change in their auditing methodology and the amount of data that they have at their disposal. While agents are not required to request a copy of the taxpayer’s original software, they are likely to do so if their examination covers more than a particular expense item.
Reviewing electronic accounting records permits the agent to view dated transactions and subsequent changes, including the user name of the person who made the entries. This is a substantial increase in the amount of data previously available to an agent. There is some concern that adjustments made to the accounts in the accounting software could raise questions by the auditor.
Further, there is concern about how much data becomes available to the auditor. Traditionally a taxpayer would be required to provide an agent only the specific information requested by the agent. The requirement to provide the entire backup file will probably include periods not currently under audit and will undoubtedly include information that the agent would not have otherwise requested. At present the more popular small business accounting software does not permit single year backup files. Therefore, the file provided to the IRS would probably contain multiple periods with all the attending additional data.
There are additional concerns that accounting records may include “privileged” information (ie: employee or patient medical information or attorney/client information), which the taxpayer is not permitted to disclose to third parties, including the IRS.
At this point the IRS is learning how to use electronic records and has not yet developed standard operating procedures. However, we can be reasonably assured that those standard procedures are coming, and that those procedures will be designed to provide greater access to taxpayer’s data.
For additional information, please review the IRS’s Use of Electronic Accounting Software Records; Frequently Asked Questions and Answers, or contact Levin Swedler & Company – Certified Public Accountants.
Written by: Gary D. Levin, CPA, CVA