LEGAL GUIDE
Written by attorney Salvatore Curcuru | Jul 19, 2013

When the IRS Requests Your QuickBooks File

More and more businesses are using electronic accounting software, such as QuickBooks, to keep track of their business activity. The IRS is well aware of this and is beginning to request backup copies of electronic accounting records.

There is quite a bit of uneasiness about this because years of information are contained in the backup file, and the IRS potentially has access to years not under audit. This isn’t as much of a concern when the IRS requests paper documents because only documents during the audit year(s) are handed over to the IRS.

WHY DOES THE IRS WANT ELECTRONIC RECORDS?

In a recent FAQ article posted on the IRS website, the IRS lists three reasons why it is requesting electronic records:

  • A backup copy of a file contains most of the accounting records for the audit period so the IRS can simply request the backup copy rather than request numerous items in an information request
  • the taxpayer will not have to print out numerous requested documents
  • the efficiency of the audit is increased because the IRS can “drill down" to the underlying data and documents to further investigate items.

UNDER WHAT AUTHORITY CAN THE IRS REQUEST MY ELECTRONIC RECORDS?

Under Internal Revenue Code Section 6001 and Regulation 1.6001-1, taxpayers are responsible for maintaining sufficient books and records to support the income and deductions claimed on their tax returns and for presenting this information to the IRS when requested to do so in an audit.

Internal Revenue Code Section 7602(a)(1) grants the IRS authority to examine any books, records, papers, or other data that may be relevant to an audit. Section 7602(a)(2) grants the IRS authority to summons the books and records.

As the IRS can request paper records, it can also request electronic records. If taxpayers refuse to produce paper or electronic records, the IRS may summons those records.

DO I HAVE TO GIVE THE IRS MY PASSWORD?

It is best to temporarily change the password to your accounting file to something like “IRSaudit", make the backup copy to give to the IRS, and then change the password back to your normal password. The temporary password must have administrator access.

THE IRS SHOULD ONLY REVIEW THE PERIOD UNDER AUDIT

An electronic accounting file will contain many years of information. The IRS should review data only for the year(s) under audit. If the IRS decides to expand the number of years under audit, the IRS will notify taxpayers and then access the additional information in the file.

Comfortable with this? Me neither.

One option is to archive or condense data prior to the audit period. This way, the IRS cannot readily access the archived information. However, if the IRS expands the scope of the audit, the information must be restored from archive.

While the IRS can only access years under audit, they can review information for the month prior to and the month after each year under audit. The IRS does this to ensure proper cutoff of income and expenses for each year (i.e., to make sure income and expenses are recorded in the proper years).

THE IRS MUST PROTECT CONFIDENTIAL INFORMATION

The IRS is prohibited from unauthorized disclosure of taxpayer information during the course of an audit. IRS employees receive annual training on protecting taxpayer information from unauthorized disclosure and are reminded that they could face disciplinary action for such disclosures.

The IRS has procedures in place to protect electronic files. Once the IRS no longer has a need for the electronic file, examiners can return the data to the taxpayer or dispose of it following internal procedures.

Comfortable with this? Me neither.

Certain information may be privileged and does not have to be handed over to the IRS.

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