Your QuickBooks Company Data File, the IRS and You

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 –  https://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00006001—-000-.html
• Regulation 1.6001-1(a) and -1(e) – https://frwebgate.access.gpo.gov/cgi-bin/get-cfr.cgi?TITLE=26&PART=1&SECTION=6001-1&TYPE=PDF
• Revenue Ruling 71-20 https://www.uiowa.edu/~fusrmp/irsruling71-20.html
• Revenue Procedure 98-25 – https://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, https://www.ebaea.org/cgi-bin/dada/mail.cgi/archive/Bulletin/20100623212855/ and https://www.irs.gov/businesses/small/article/0,,id=229050,00.html

Additional online discussions regarding this topic can be found at:

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

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