Sunday, June 27, 2010

QuickBooks Helping IRS Audit Your Books?

The IRS and Intuit are joining forces to make it easier to audit your small businesses. This information was provided from a recent liaison meeting. Does this allow auditors the ability to review QB data that is NOT within the audit scope allowing the audit to be expanded? Let me know your thoughts.



ISSUE:

I was informed yesterday by a Revenue Agent that a national directive has been issued to all Revenue Agents to obtain a copy of the QuickBooks file for any taxpayer being audited who uses QuickBooks. Apparently each audit group has one license from Intuit.

What I plan to do is to use the utility feature to condense prior years so that no detail can be accessed. My audit is for 2008, but obviously other periods can be opened if they want. Hopefully this is not their intention....I have asked for a copy of the directive.

My main concern is the cost of audit representation for our clients if the IRS goes crazy with this. I would love to get your thoughts on this.


RESPONSE:

There have been some substantial changes in the last six to twelve months regarding the issues raised. The IRS has purchased 1500 to 2000 licenses from Intuit and will have one agent trained and licensed per group to assist others in the examination of taxpayers who use QuickBooks. Agents are instructed to obtain a copy of the taxpayer's data base for the year under examination only when it is necessary. This examination tool will not be used in all cases - it is the judgment of the examiner.

IRS has found that many taxpayers do not save hard copies of their records or the copies they have are incomplete. The Service also found that taxpayers reuse an old version and over write the prior year. The examiner may request the data base to verify the integrity of the internal controls. A definite problem could arise where a client thinks they have turned off the internal audit feature to avoid  tracking of adjusting entries but the program does not totally delete these items.

If the qualified representative (power of attorney) considers the Revenue Agent's request for the data base as totally unnecessary, he/she should speak to the agent's group manager. If the taxpayer/representative refuses to provide the data base and the revenue agent/manager determines it necessary, a Summons to obtain the information would be issued.

I spoke with our SB/SE national Technical Advisor for electronic records in our Exam Special Processes unit regarding the issue stated below. The Revenue Agent referenced in the question may have been referring to a memo issued by Monica Baker, the Examination Director, in late April announcing the implementation of the QuickBooks software availability to Revenue Agents. However, there is no written directive that has been issued instructing Revenue Agents to request the electronic data file in every instance where the taxpayer uses QuickBooks or other electronic records.

While Rev Proc 98-25 provides the authority for the IRS to request electronic records, in most cases (with exceptions), the Service will generally request the data file if some sort of electronic system was used. It is indeed up to the agent's and manager's judgment at the group level to make the request.

Although the data file generally retains information from the date of initial input to the date of backup which could obviously include multiple years in addition to the actual audit year, agents are instructed to look at the information only for the year under exam. If there is a decision to expand the examination to prior/subsequent years, then information for those years could be reviewed. As mentioned, using the cleanup utility condenses prior year information into a summary, rather than a detailed, format.

As the software finds its way into RA groups and more agents are trained in its use, we could definitely be seeing a trend in the way exams are conducted since so many small businesses use QuickBooks.


Gerry Kelly-Brenner
ID #94-06950
Senior Stakeholder Liaison Specialist
SBSE Communications, Liaison & Disclosure

Internal Revenue Service
1301 Clay Street, Suite 1090S
Oakland, CA 94612

The Tech Accountant

10 comments:

20 20 tax resolution articles said...

So what do you reckon, will this be an advantage or not? How can QB affect the auditing process of IRS Agents?

The Brico Group, Inc. said...

20 20 good questions. I think that if IRS agents have the ability to look at QB files (esp prior years) there may be an issue. There are some third party apps that can condense a QB file so that only the year under review can be accessed. I would love to hear from anyone who has actually gone thru an audit of their QB file.

Anonymous said...

Per Rev Rul 71-20, taxpayers with assets of less than $10MIL are not required to produce machine-sensible (electronic) copies of their accounting records so long as their paper print outs contain all relevant data. Do not automatically hand over your Quickbooks file to the IRS!

The Brico Group, Inc. said...

Thanks for the information regarding the Rev Rul 71-20 anonymous.

sarah said...

I want to join cima courses ( Chartered Institute of Management Accountants ) . This information will be very usefull for me, thanks

Matt said...
This comment has been removed by the author.
Aaron said...

I used a company called QB or not QB that specializes in limiting QuickBooks files for IRS audits.

You can find their website here.

I didn't like the process of going through the audit, but I felt better knowing the IRS was only looking at my 2008 data (the year under audit) and they couldn't scrutinize my changes in the audit trail.

Aaron

irs tax attorney said...

I would like to add that in the newer versions of QuickBooks, you CANNOT turn off the audit trail. Therefore,
once you enter it in QuickBooks, it is NEVER gone. Like that picture from a presidential candidates “experimental” days, it will resurface. You can't undo it. So use caution as you enter things and forget about delete.

form 2290 said...

How is it that QB don't have that feature? I just don't get it.

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