IRS wants your QuickBooks file
Tuesday, December 14th, 2010
The IRS recently announced that tax examiners across the nation are now trained in QuickBooks, and they are requesting taxpayers’ company files to conduct tax audits. Should you willingly hand over your company’s QuickBooks to an examiner? We think that’s an invitation to trouble.
If your company has been using QuickBooks for bookkeeping since it started, the working file contains the complete financial history of the company. Later versions of the software also contain an audit trail showing how, when, and by whom each transaction was entered, modified, or deleted.
Most tax audits question specific parts of the tax return and request documentation to support them. Our second rule of tax audits is to never give the IRS more information than they need to conduct the examination. Having access to the company’s complete books, the auditor would be tempted to look into other areas or other tax periods. This could lead to an increase in the scope of the audit, which we try to avoid by limiting the information the auditor receives.
What if the IRS requests your QuickBooks file? We find that we can provide the information the examiner needs by printing reports from QuickBooks and providing copies of supporting documents. By doing so, we deprive the auditor the opportunity to go on a “fishing expedition” and open up the examination to new areas.
What if they insist on the file? Karen Hellmund, our QuickBooks Pro Advisor, suggests one method. Using the ‘Clean Up Company Data’ utility, QuickBooks converts old transactions into monthly summary journal entries, making it impossible for a tax examiner to snoop through the individual entries in prior periods. To preserve your working file, run a backup, then restore the backup and run the cleanup utility. You might do this each year after “closing” the year, resulting in a series of files containing mostly transactions for the year. (The cleaned up file would also contain entries for the subsequent year up to the date the file is backed up.) Providing the cleaned up file to the auditor would provide only partial protection, because the file would still contain all entries for the year under examination. We consider providing the QuickBooks file to be a last resort.
Our first rule of tax audits? Tell the examiner one thing only: “I’ll have my representative call you.” Then call an experienced tax professional to represent you in the examination. We know the tactics of IRS personnel and the appropriate responses to achieve the best possible outcome under the circumstances.
Does the IRS have the authority ask to view your online quickbooks account during an audit?
The IRS has the authority to request documentation to support amounts reported on your tax return. Typically, an accounting system is used to organize source documents and calculate amounts to be reported on the tax return (or financial statements, for another example). Our thinking is that if the IRS has access to the entire accounting system, you leave the door open to an unwanted expansion of the scope of the audit.
If the IRS asks for your Quickbooks file or online access, offer to generate the reports they need instead. You can be cooperative while setting boundaries that protect you from unnecessary overreaching by the IRS.
Here’s an example. If the IRS asks for documentation of travel expenses, what they really need to see is hotel and airline bills, rental car receipts, etc. along with proof (e.g., canceled checks, credit card statements) that the taxpayer actually paid for them. You should provide copies (not originals!) of these documents, and then generate a report from your accounting system that totals and ties the source documents to amounts on the tax return.
Dealing with the IRS is a difficult proposition for many people. We suggest that you seek out the services of an experienced professional (such as us) to represent you, especially in more complicated audit situations, or where the IRS proposes changes that result in large additional tax assessments. We hope your case is resolved favorably!