Your QuickBooks Company Data File, the IRS and You

Published February 28, 2011 | By Nancy Smyth

Yes, it’s true. The IRS can *LEGALLY request a backup of your QuickBooks (or Peachtree) company data file if you are being audited.

BACKGROUND:
In 2010, the IRS purchased somewhere between 1,500 and 2,000 licenses for the QuickBooks 2010 Premier Accountant Edition from an ISP (Inuit Solutions Provider) and not directly from Intuit as it is made to look in announcements (SEE NOTE BELOW).

Approximately 1,100 agents were trained to utilize QuickBooks and these agents have been instructed to obtain a copy of the taxpayer’s data base for the year under examination ONLY when it is necessary. This method of examination of taxpayer records will not be used in all cases — however, it will be up to the examiner.

When requested, the electronic files should be provided on a CD, DVD, or flash/jump drives to ensure the security of the files. Email should NEVER be used to submit files.

Apparently business owners and tax professionals have been advocating that the IRS begin accepting taxpayer records in electronic format instead of continuing to use more traditional paper books and records for audit purposes. This is according to the IRS Small Business/Self-Employed Examination Division; who is responding to the wishes expressed in tax practitioner focus group interviews conducted at the 2008 Nationwide Tax Forums as well as other stakeholders.

Why on earth would anyone want the IRS to begin accepting taxpayer records in electronic format? Well, in reality it does provide advantages, such as:

Reducing the taxpayers burden because they don’t have to print records which are stored within their accounting files.
Provides a complete set of records, which decreases the number of items included in the original request and/or follow up requests for additional documentation.
Results in faster audits and therefore provides faster resolutions.

Look for tomorrows article on what to do if the IRS requests your QuickBooks data file.

NOTE: Thanks to Alison Ball from Intuit for taking the time to contact me and let me know that the licenses were not purchased directly from Intuit. According to Alison, Intuit is actually prohibited from selling to the government, probably because it would be a conflict of interest because Intuit relies on the IRS to provide new tax code each year.

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*RESOURCES FOR ACCOUNTING PROFESSIONALS AND OTHER INTERESTED PARTIES:

The legal authority for requesting a taxpayer’s QuickBooks or Peachtree backup files and accounting records is based on:

IRC Section 6001 – http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00006001—-000-.html
Regulation 1.6001-1(a) and -1(e) – http://frwebgate.access.gpo.gov/cgi-bin/get-cfr.cgi?TITLE=26&PART=1&SECTION=6001-1&TYPE=PDF
Revenue Ruling 71-20 http://www.uiowa.edu/~fusrmp/irsruling71-20.html
Revenue Procedure 98-25 – http://www.irs.gov/businesses/article/0,,id=180708,00.html

It is also important to note, that Revenue Procedure 98-25 does not prevent or exempt a taxpayer from providing electronic records, if those records exist. If a taxpayer or authorized representative refuses to provide the database and the agent determines it is necessary for the audit, a Summons to obtain the information could be issues.

Also see, http://www.ebaea.org/cgi-bin/dada/mail.cgi/archive/Bulletin/20100623212855/ and http://www.irs.gov/businesses/small/article/0,,id=229050,00.html

Additional online discussions regarding this topic can be found at:

Tax Almanac – http://www.taxalmanac.org/index.php/Discussion:IRS_Auditors_to_be_trained_in_Quickbooks

Successful QuickBooks Consultants on LinkedIn – http://www.linkedin.com/groupItem?view=&gid=157449&type=member&item=23839279&qid=64ddee41-3223-43aa-a3b6-fc63f104925a&goback=.gmp_157449

6 Responses to Your QuickBooks Company Data File, the IRS and You

Nancy Smyth on June 24, 2011 at 9:00 am

Scott, thanks for this new information. For anyone visiting and reading this article, Scott wrote a great post on this topic on QuickBooks and Beyond – be sure to check it out as well. The more information that we have about this subject the better prepared we will all be.
Scott Bonacker on June 23, 2011 at 9:05 pm

There was a tax update from AICPA last week, and there haven’t been any new pronouncements or explanations on this subject. The advice remains the same – if a file is requested, talk to the examining agent about it.

Anecdotally, there are reports that the files are not requested in every case and the traditional printouts and summaries are still accepted for most purposes.,
Diane Offutt on March 26, 2011 at 9:17 am

I agree with Keith completely. DO NOT submit the whole QB company file that may have years of information.

Karl Irvin provides great software that will allow us to assist our clients with maintaining their privacy by extracting ONLY the year in question, then creating a file and call it AUDIT_YR_1234

Diane Offutt, EA, MAcc
Accounting Connections, LLC
Woodstock, GA 30189
Keith Gormezano on March 1, 2011 at 5:44 am

One thing to keep in mind is that if the IRS asks for a copy of the company file for a particular tax year, you should only provide the tax year requested. Not the whole file.

Otherwise, the IRS could easily start to snoop and perhaps find more than they were originally looking for. There are services that can convert a company file so that only a particular period of time are available.

That is why we have a Fourth amendment.
Nancy Smyth on February 28, 2011 at 6:36 pm

Hi Jo Ellen
Thanks for stopping by and taking the time to leave a note 🙂 The next two post should also be helpful, please let me know if they are.
Jo Ellen Peters on February 28, 2011 at 5:54 pm

Thanks for posting this. I’ll look for your article tomorrow, too.