IRS Responds to AICPA Accounting Software Examination Letter

More about the IRS requesting backups of QuickBooks and Peachtree company files from the Journal of Accountancy, written by Benson Goldstein, J.D.

In a March 29, 2011 letter from Patricia Thompson, chair of the American Institute of CPA’s (AICPA) Tax Executive Committee, to Chris Wagner, commissioner of the IRS’ Small Business/Self-Employed Division, the AICPA communicated its concerns regarding the Service’s program to request the accounting software files of certain small business taxpayers under examination; the letter cites QuickBooks and Peachtree as examples of accounting software actively used by small businesses.

IRS audit quickbooks fileThis is a critical matter because the use of accounting software has become commonplace by businesses in meeting the requirement to maintain proper “books and records,” including records involving income, expenses, assets and other pertinent information. If the firm is subsequently selected by the IRS for examination, the Service’s general position is that the entire file must be turned over to the IRS, even though it may contain information:

  1. from tax years unrelated to the years under examination; or
  2. even data not normally considered part of a firm’s “books and records” as it is commonly understood for tax administration or audit purposes.

In response to the AICPA’s March letter, 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.”

The AICPA’s March letter urged the Service to begin a dialogue on the issue to ensure reasonable safeguards are put in place “to protect small business taxpayers from turning over more data in an electronic format than is necessary for the IRS to perform an examination.” In addition to requesting further dialogue with the Service, the AICPA has also begun discussions with two of the nation’s accounting software developers about helping CPAs and their small business clients provide the Service with only the data that is responsive and relevant to an IRS examination—but not more. While stating it wants an exact copy of the electronic file, the IRS’ April letter offered the following “suggestions” to address the concerns of CPAs and their clients:

  • The client should consider backing up its electronic data files annually at the end of each tax year. This would lessen the amount of data provided to the IRS should the client undergo a subsequent audit.
  • The client’s electronic data files may generally be condensed for dates prior to the tax year(s) under audit, but condensed data is not acceptable (according to the IRS) for the years under audit. However, the IRS reserves the right to request another backup file involving data from the archive file created during the condensing process should the scope of the audit expand.

The AICPA will keep members informed about its ongoing dialogue with the IRS about ways small business taxpayers might provide the Service with the necessary data in electronic format (from the software file) while providing taxpayers with appropriate safeguards.

—Benson Goldstein is a senior technical manager (taxation) with the AICPA in Washington.

5 thoughts on “IRS Responds to AICPA Accounting Software Examination Letter

  • Bruce I agree – folks need to find and rely on someone who is FAMILIAR with the day to day use of QuickBooks or any other accounting program (not your garden variety person who only runs reports to pull data).

    Even after all this time (and yes this is an old post) things are still pretty “iffy” out there.

  • Lynda, Nancy….
    The IRS rules covering the QB (or other accounting system) files are rough as this is new ground still in the IRS world. They have had the ability (each office of the IRS has a QuickBooks license and a designated IRS agent who has received training in the use of the software) since 2010.
    (I think Nancy, you have a paper on this)
    Once The IRS had this ability we as tax professionals have been working “the system” as best we can. Ideally what is being suggested is a good idea, find a service to extract only the year under investigation. It doesn’t make them happy, but there are no rules at this point (Yes Jan 6, 2014) that say not to do this.
    Also be sure if you find yourself in an audit – if you use QuickBooks, find an Enrolled Agent (EA), or other tax professional that is also familiar with the day to day use of QB or whatever system being used. An EA that is also a QB – ProAdvisor is your best choince but don’t stop there…. interview them and make sure they also know your industry.

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  • Lynda – in my opinion, what you are telling your clients is sound advice – go to Matt Clark (or any of the others who offer this same type of service) and extract the year in question. I totally agree about not turning over the full working file. I have only had one customer (that I know of) who has been audited, I recommended Matt’s service and the stripped out file was accepted by the Auditor. All of this is still so new and there is so many unanswered questions about procedures with very little in the way of very specific answers. This leads me to believe that we’ll be hearing much more about this topic. I will do my best to keep my eyes & ears open for information and relaying it here.

  • That is an interesting article, Nancy. I have been advising to my clients to go to Matt Clarke at and have the year being audited extracted for the IRS. That makes me wonder if that would be acceptable to them. I do not advise they turn over the working file.

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