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February 7 2012

IRS Audits of Small Business Software Files

By Jim Buttonow, CPA/CITP

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.

Executive Summary

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

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Comments (3)

  • mlm business software

    02.16.12

    Thank u

    Your blog is very informative..

    I’ll keep updated eith the same…

    Reply

    • Auth

      05.26.12

      I’m not sure why you are getting angry about the tax he will owe. Everyone has to pay tax to fund all the thgnis we take for granted (like the NHS, or decent roads, etc). By definition tax is a fraction of income / profit, so if he is paying a lot of tax then he is also making a lot more for himself.Your husband owns, and is possible also employed by, his Ltd company.If he is not an employee then his only income from the company will be dividends. These are paid out of profit after corporation tax has been paid. So, first the company calculates its profits. These are then subject to corporation tax at 20% (assuming profit under a3300,000). Some or all of the taxed profit can then be distributed as a dividend. Up to the basic rate income tax limit (about a342,000) there is no further income tax to pay because the dividends are paid as if basic rate tax had already been deducted. If the dividends take the recipient into the higher rate tax bracket then they need to top up the tax to the higher rate. On dividends the basic rate is 10% and the higher rate 32.5%. So the top-up is essentially a further 22.5% of the amount over the basic rate threshold.If you husband is an employee then the company will pay him a salary in the same way as any other employee. This will be liable for income tax and national insurance deductions via PAYE. However, salaries and associated costs are an expense of the company, so they reduce the profit, so corporation tax is not payable on this amount.Its possible for the salary to take the whole profit of the company, but it might not. In which case your husband could take some income as a salary and some as a dividend.Which blend of these options results in the lowest overall tax bill depends on your exact circumstances. You would need an accountant to look at everything to give a definite answer.Be aware, even if you want to have income paid to the company then to receive it as dividends, HMRC will not always allow this. If you are a contractor for a single company and you work in the same way as an employee of that company, then HMRC require you to be taxed as an employee ie to pay income tax and NI on the income. But I suspect this does not apply if your husband works from home.If your husband is paying higher rate tax, and you do not, then he may be able to reduce the tax bill by making you a shareholder in the company. That way you could receive dividends up to your basic rate tax threshold, which would reduce the overall tax paid.There may also be many other ways to reduce your company or personal tax bills. A few hours with an accountant may well pay for itself.

      Reply

      • Lacat

        08.06.12

        USA question/answer.In tohrey, your withholding was decreased by $400. The tax form adds the $400 back. That makes you even and your refund is what it would have been if they had never monkeyed with it.The same is true for 2010.

        Reply