In a March 29 letter from Patricia Thompson, chair of the AICPA’s 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.
This 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 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.