The American Institute of CPAs wants the Internal Revenue Service to work with small-business owners to safeguard the private data in electronic accounting software records that the IRS may request during an examination.
The electronic records might contain private information about clients unrelated to the tax return under examination, the AICPA warned the IRS.
“Once the software file of a small-business taxpayer is requested by the IRS for examination purposes, the AICPA believes the taxpayer should have the right to ‘redact’ the software file and turn over only the data that is responsive and relevant to the examination—but no more,” the AICPA wrote in a letter to IRS Small Business/Self-Employed Division Commissioner Chris Wagner.
The AICPA has received inquiries from CPAs about how to handle an IRS request for their accounting software files, especially when the files include data that is not pertinent to an examination or information from years other than the one being reviewed by the IRS.
The AICPA told the IRS it understands that receiving data in electronic format helps speed up the examination process, but that “reasonable safeguards should be available to protect small-business taxpayers from turning over more data in an electronic format than is necessary for the IRS to perform an examination.”
The letter comes as a follow-up to conference calls the AICPA has had with the IRS SB/SE Division regarding its roll-out of a program to request the QuickBooks or Peachtree files from certain small-business taxpayers under examination (see IRS Auditors Begin Accepting QuickBooks and Peachtree Records).
“The file may contain other data that could be considered private, confidential, and beyond the scope of the pertinent information for the audit,” wrote AICPA Tax Executive Committee chair Patricia Thompson. “The accounting community has been working with the software vendors to be able to produce electronic files that include only the necessary information for the audit.
Unfortunately, we are hearing that commercially available accounting software does not make it easy for small-business persons to segregate the data between data that is responsive and relevant to an IRS examination and data that is not.”
When the IRS’s small-business accounting software examination program was initially rolled out, Thompson noted, a number of people compared it to the procedures that the IRS’s Large Business & International Division has in place when dealing with requests for the general ledger and subsidiary files of a large taxpayer in electronic format.
“We do not view SB/SE’s accounting software examination program as being comparable to LB&I’s program,” said Thompson. “Specifically, the large taxpayer undergoing an IRS examination is routinely represented by tax professionals, and the data being turned over in electronic format does not contain extraneous information unrelated to the LB&I examination involved. By contrast, because the small-business taxpayer often maintains his own accounting software file and is not a trained bookkeeper or accountant, the data in the software file is not necessarily directly relevant to the IRS examination.”
The IRS has argued that an IRS revenue agent has the right to request a taxpayer’s software file because the file is within the definition of “records” for purposes of Section 6001 of the Tax Code. However, the AICPA contends that the software file contains more than just the books and records applicable to the IRS examination.
“The software file routinely contains both tax-related and non-tax-related information, as well as information that may not be relevant to the tax years at issue or to the issues under audit,” Thomson noted. “For example, the accounting software file might contain a taxpayer’s client or customer list. In the case of an attorney or someone in the medical profession, it may contain information clearly considered confidential under the law.”
The AICPA hopes to discuss with the IRS the ways that small-business taxpayers might provide the necessary data in electronic format from the software file, while the IRS provides them with the appropriate safeguards.
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