IRS Begins to Examine Accounting Software Records

The Internal Revenue Service has released a memorandum to its examiners instructing them on what types of information they are now allowed to get from small business taxpayers’ accounting software data.

The memorandum provides guidance on when to request accounting software backup files from a small business taxpayer during an examination, and the restrictions placed on examiners when reviewing the software data and safeguarding the records.

“Generally, backup files contain transactional data for tax years prior to and beyond the year(s) under examination because many of the software products do not provide for an option to create a backup for only a specified time period,” said the memorandum from IRS Small Business/Self-Employed Division examination director Shenita L. Hicks. “Examiners should only review data relevant to the year(s) under examination. An exception may be reviewing transactions for the month prior to and the month after the tax year or the tax periods before and after the ones under examination, if the transactions in those timeframes are relevant to the data sought. Examiners may also review any transactional data created or changed during the tax year under examination.”

In addition, the IRS has posted new information on a frequently asked questions page on its Web site about the use of electronic accounting software records. The IRS noted that at this time, it has the ability to accept and read data files from the accounting software programs used by most business taxpayers.

The IRS met with the American Institute of CPAs and several accounting software vendors last Thursday, according to the Journal of Accountancy. At the AICPA-hosted meeting, the Institute encouraged software developers to provide options allowing users to provide only the data that is relevant to the IRS examination. With some accounting software packages, it is difficult to isolate the backup data for only the specific period under examination by the IRS.

According to the IRS guidance, examiners are only supposed to review data relevant to the year or years under examination. However, they can make an exception when reviewing transactions for the month prior to and the month after the tax year or the tax periods before and after the ones under examination, if the transactions in those timeframes are relevant to the data they are seeking. Examiners can also review any of the transactional data that has been created or changed during the tax year under examination.