IRS Audits of Small Business Software Files
Tax practitioners have always been cautious with the records they provide to the IRS in an audit to control the depth of an IRS inquiry. But IRS agents are starting to request client backup files from small business accounting software such as QuickBooks and Peachtree, and many practitioners are concerned about how much information the IRS is requesting and how it is using that information. This article explores the IRS’ legal authority and long-standing use of electronic records in audits and takes a closer look into how the IRS requests and uses electronic files. It offers tips for CPA practitioners in responding to IRS requests for small business accounting files and for their clients in adjusting bookkeeping practices to minimize undue IRS inquiry during a small business audit.
In its examinations of the returns of small business taxpayers, the IRS is increasingly requesting electronic files of accounting programs such as QuickBooks and Peachtree. While taxpayers and their CPA tax preparers must be responsive to these requests, they must also take care to provide no more taxpayer data than a request reasonably covers.
The IRS has instructed its examiners to generally request a copy of taxpayers’ original backup files for audits of such potentially wide ranging items as verifying gross income, although it has indicated a request may not be necessary with respect to a single expense item. Examiners also should limit their requests to the tax year under examination but will request records of other years when needed to verify a current-year item from prior- or subsequent-year accounting.
Although the IRS has issued no specific guidelines regarding privileged information in a file, such as medical records, guidance indicates some redaction may be possible with the consent of the examiner.
Click here to read the full article from the Journal of Accountancy