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Can the IRS Request Your QuickBooks File?

Yes, it is true that the IRS can request your QuickBooks file!

But make sure you read this entire post so you understand the implications of coughing it up.

Since I don't work directly with the IRS in my QuickBooks consulting practice, I paired up with a business associate, Tom Judge of Judge, Lauric and Pahoresky to review and break down this issue in more detail.

HOW IS IT THE IRS CAN REQUEST MY QUICKBOOKS INFORMATION?

There has been (and I'm sure will continue to be) a significant amount of buzz in the accounting and QuickBooks worlds relating to IRS Revenue Procedure 98-25.

This Revenue Procedure provides the authority for the IRS to request electronic records, and QuickBooks (as well as Peachtree, Great Plains, etc.) data certainly meet the definition of electronic records.

THE IRS IS GEARING UP

It has been reported that the IRS has recently purchased between 1,500 and 2,000 copies of QuickBooks software and has begun a program to train their auditors on how it works.

The actual rollout of these requests for QuickBooks files is still very unclear and may vary significantly from case to case. We'll definitely be hearing more about the issues surrounding these requests as time goes on.

CRITICAL THINGS YOU NEED TO KNOW IF YOUR QUICKBOOKS FILE IS REQUESTED

In my discussion with Tom about this issue, he makes an excellent point...

"Transactions need to be executed properly and accounted for appropriately in QuickBooks. QuickBooks is a wonderful tool to run your business efficiently, but the user needs to exercise care with how their transactions are entered and document why a certain position is taken. The IRS states in one of its' Revenue Procedures its purpose is to evidence the authenticity and integrity of the taxpayer's records. How they do this is by examing transactions and verifying items are accounted for properly  (record revenue when earned and record expenses when incurred and are legitimate business expenses."

THE DANGER OF HANDING OVER YOUR QUICKBOOKS FILE

When a business is undergoing an audit, the audit period is usually for a specific period of time (i.e. year). In these situations, you provide the auditor with the requested information that applies only to that year. This keeps the focus of the audit squarely on the period in question.

However, your QuickBooks file contains data for ALL of the years you have been using it. If you hand it over to the auditor, the auditor would then be able to "poke around" in periods outside of that being audited and potentially raise questions about various transactions that have nothing to do with the topic of the audit or the period being audited.

A POTENTIAL SOLUTION

Should your business be asked to provide its' QuickBooks file, you'll want to immediately get the input of your tax accountant about how they want to handle the request. It is very likely they will already have been involved in the audit process with the IRS before such a request is even made.

In addition, you will want to consider the possibility of creating a special "archive copy" of your QuickBooks file to present to the auditor. Using the "Clean Up Company Data" utility that is baked into QuickBooks, you can create a special version that does not have any transaction detail on or before a certain date (i.e. on or before the date of the audit). The "archive copy" doesn't help you with accounting data AFTER the audit period, but some protection is better than none!

 

THIS IS JUST THE FIRST CHAPTER

Much more will be written in the months ahead about this new program that is being launched by the IRS.

It is absolutely critical that you enlist the professional assistance of a tax adviser like Tom should the word "audit" and your business name show up in the same sentence.

I'd like to take a moment and thank Tom for taking the time to provide his insight and perspective on this issue!

What's your take on having the IRS request QuickBooks files?

Has your business already been asked for it? How did the audit go?

Please feel free to post a comment below - your thoughts are welcome!

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Comments

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Nancy:

Thanks very much for the update on this.

This "exact copy" stipulation could be a game changer - it eliminates the concept of creating an "IRS only" version of the file.

Indeed - it will be very interesting to see how this shapes up in the coming months. I'm afraid it may get ugly out there.

Scott Gregory

Scott, you are correct - there is a lot of "buzz" going around about this issue.

In response to the AICPA’s March letter (sent to the IRS), the IRS sent a letter on April 20, 2011 to the Institute stating that “it is important an exact copy of the original electronic data file be provided to the examiner and not an altered version.” The Service wants to see the original data file because it would help identify whether there have been deleted or altered entries to the file. The letter elaborates that “the original data file may provide the date a transaction was originally created, dates of subsequent changes, what changes were made, and the username of the person who entered or changed that transaction.”

I'm sure there is going to be a LOT more debate on this issue in the upcoming months.

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