CPA Blog

CPA & Accounting Topics for Business

IRS Wants Your Data File - Houston Business CPA

Big brother is at it again. Over the past three years, the IRS has expanded its tools it can use to get more money from you. Recently, they increased the penalties upon preparers of tax returns the IRS deems to be inaccurate and now they are increasing the data gathering ability of the agency. The IRS is now requesting your data file when they select an unfortunate business for audit. In the past, when a business was selected for audit, a copy of the general ledger and financial statements in print format were provided. Recently, the IRS has purchased over 1,500 licenses from Intuit and agents are being trained on how to use the small business software.

What Does this Mean?
When a business is selected for audit, the entire QuickBooks file must be turned over to the IRS, even though it may contain information from tax years unrelated to the years under examination; or data not normally considered part of a firm's books and records. For example, if the IRS is auditing your 2010 corporate return, they can request your QuickBooks file which may contain your 2009 and previous data as well as your 2011 data. This 2009 and previous years data is well beyond the scope of the audit as is your 2011 data and is not subject to the audit. But now the data is in the data file, so the IRS can see it.

The American Institute of Certified Public Accountants sent a letter on March 29, 2011 requesting clarification of the IRS position and to seek further clarification of its procedures. On April 20, the IRS responded "it is important an exact copy of the original electronic data file be provided to the examiner and not an altered version." The AICPA states that the IRS 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."

So How Do you minimize the Intrusiveness of the IRS?
Your Electronic data files should be backed up annually at the end of each tax year to allow the business to provide a data file that does not provide as much subsequent year data. This would mean that businesses should get their tax year closed as quickly as possible to minimize the subsequent year data file information exposure to the IRS.

If you are unfortunate enough to be audited, prior year's data in the file can be compressed. The IRS specifically states in their letter that to the AICPA that condensing data "is acceptable as long as the condensed data does not include transactions created or changed for time periods under audit, or for transactions from prior years that have an effect on the years under audit. However, if the scope of an audit is expanded, the IRS may request another backup file that was created prior to the date the company file was condensed or request a copy of the archive file that was created during the condensing process. "

An Additional Cost Burden on the Small Business
In these tough economic times, the small business is getting another indirect tax burden placed upon them. To comply with the IRS mandate and to protect itself from the IRS, a backup of the data file used to prepare a tax return must be kept by the client. Most tax preparers may start offering a backup storage fee to protect themselves and their clients from the ever increasing penalties and aggressive audit tactics of the IRS.

Develop a Tax Plan
As I always say, the best defense is a good offense. Have a plan for dealing with the IRS. Work with your CPA to understand the IRS code sections that are relevant to your business. Have your CPA develop a tax plan that allows you to take advantage of every legitimate deduction and put more money in your pocket. Finally, make sure your business is keeping complete books and records.

If you do not have a plan for dealing with the IRS, then call us. We will protect you and show you how to keep more of the money you work so hard to earn.

Goodbye 2011, Hello 2012! - Houston Business CPA