Companies using QuickBooks, Peachtree or other popular accounting software have greater risk in IRS audits, or IRS examinations than ever before.

Previous IRS Examination Procedures

Previous to new IRS procedures, IRS examinations of Company records would generally be limited to the year of the examination. Prior year summary accounting information (income, expenses, assets, liabilities and equity by major classification) would be gathered mostly for comparative purposes, where the IRS would look for large differences from one year to the next.

New IRS Examination Procedures

New IRS procedures gather electronic information recorded in accounting software for all transactions from inception (or the date the Company started using the accounting software) through the current date.

Companies using QuickBooks, Peachtree or other accounting software that are selected for audit or examination by the IRS must now turn over the entire accounting file 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.

The IRS is now demanding “an exact copy of the original electronic data file” to help identify where there have been deleted or altered entries, when the date the original transaction was created, dates of subsequent changes, what changes were made and the username of the person who entered or changed the transactions.

What Problems Can You Expect?

  • Increased scrutiny of non-financial information that impacts the audit;
  • Significantly increased risk of examining other tax years;
  • Increased risk of suspected fraud and data manipulation;
  • Increased risk associated with related party transactions;
  • Increased risk associated with poor accounting practices;
  • Increased risk associated with travel, meals, entertainment and reimbursements

Three Things You Can Do Now to Help Reduce Your Risk

Consider backing up your electronic files annually at the end of each tax year to lessen the amount of data provide to the IRS should you be selected for an audit. This is not to say the IRS cannot request this information for other tax years. The IRS still has the rights to do this. However, there is no need to voluntarily provide this additional information, especially in comparative form, where you help to facilitate inquiries into other tax years.

Consider condensing data files to exclude detailed entries for dates prior the the tax year audit. Prior year information will be maintained in summary form without the detail normally maintained in the books and records.

Consider reviewing and removing extraneous information not needed in support of your financial records to include notes, memos and other information no longer needed.