It’s easy to understand the IRS Small Business/Self-Employed Division’s rollout of its program to request QuickBooks or Peachtree files from small business taxpayers under examination.
It helps the IRS conduct its examinations more efficiently by speeding up the process, and the data in electronic form is more conducive to computer analysis, according to AICPA senior technical manager Benson Goldstein.
Accounting software includes some information that is responsive to an examination, along with information that is not. This has raised concern in the accounting community that the files might be too much of a good thing, as far as the IRS is concerned.
“We have members who fear that turning over too much data could lead to a fishing expedition,” said Goldstein. “They don’t want to arm the IRS with extraneous information. Obviously, the information might be necessary in some audits, such as those that border on civil fraud or criminality, but our concern centers on the routine traditional audit, where the data turned over is more than necessary for the scope of the audit. “
The AICPA hopes to address the problem by working with both the IRS and the software companies, he indicated.
“Commercially available accounting software does not make it easy to segregate the data,” he said. “So we’re encouraging the IRS to accept a redacted file from small business people, giving them only the needed and relevant data. We’re also working with the software companies to develop education aids that would inform them how to mitigate the data that would be turned over.”
The AICPA sent a letter to the IRS last week detailing its concerns over potential misuse of the data (see AICPA Urges IRS to Protect Small-Business Accounting Records). It noted that when the small business accounting software examination program was initially rolled out, it was compared to procedures that the Large Business & International Division has with respect to requests for the general ledger and subsidiary files of a large taxpayer in electronic format. The two are not comparable, according to the AICPA.
“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,” the letter stated. “By contrast, because the small business taxpayer often maintains his own accounting software file and is not a trained bookkeeper or accountant, the date in the software file is not necessarily directly relevant to the IRS examination.”
“One file might have many years of data aggregated into it,” said Goldstein. “If only one or two years are under audit, the file is giving over too much data. The file has other information in addition to these extra years. There may be information about customers, particularly the client list or records of an attorney or doctor, which would clearly be considered confidential. Unless it’s absolutely necessary, you don’t want the IRS calling your clients because they will misconstrue the call and wonder what’s wrong when there may be nothing wrong.”
With a bit of cooperation from both the software developers and the IRS, the AICPA should meet its goal of satisfying the IRS so that small business taxpayers can provide necessary data in electronic format while safeguarding the sensitive, extraneous information.
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