Q: I own a small business and use QuickBooks. I heard the IRS is now allowed to look at my QuickBooks file during an audit. Is this true?
Most of my clients tend to use QuickBooks or other popular off the shelf programs for their accounting records so this question is very important. Apparently, in its recent examinations of small businesses the IRS has begun requesting electronic files of QuickBooks from taxpayers. The tax court has recently ruled in one particular case that a taxpayer has to comply with this request or face a summons. There will no doubt be additional cases brought regarding this issue, but initial rulings tend to side with the IRS.
While the taxpayer appears to be legally required to provide the files, they are not required if the request is unreasonable. The IRS has instructed their auditors to limit their request to a single year unless the prior years are needed to verify certain items on the return of the year under audit.
So what does this mean to you? You should be careful what information you put in your QuickBooks file including any personal information you do not want an IRS agent to see. I encourage all my clients to try not to commingle personal and business money into one account. It tends to confuse the IRS and adds a great deal of complexity to an audit and tax preparation as well. I also encourage business owners to consider their talents and decide if their time is best spent learning QuickBooks or growing their business. It is often beneficial to hire a qualified bookkeeper to handle their accounting in order to ensure their records are complete and accurate.
You should consider the consequences of the audit trail settings in QuickBooks and be careful about condensing transaction in prior years. If an auditor perceives you are hiding something they tend to want to dig a little deeper. Be upfront with the auditor on what you are providing and not providing and why. Contrary to most public perceptions not all IRS agents are the devil reincarnated and will work with you in providing appropriate evidence to support your tax return.
It appears that the IRS is instructing its auditors to show some restraint in requesting full access to all data in taxpayer’s QuickBooks file. However, it is clear that this is the direction of audits in the future and you should be aware of its potential impact on your business. This audit technique is in its infancy and will be updated by the IRS through official releases and by court rulings. In the meantime you should use common sense in what is being put into QuickBooks and how it relates to your tax return.
Posted by Brian Kelsch