The IRS Can Get Your Electronic Records

If the IRS asks, you must turn over any electronic accounting records you keep for your business.

If you're one of the millions of taxpayers that uses off-the-shelf software like Quickbooks or Peachtree Accounting to maintain your accounting records for your business, the IRS says it's going to do you a favor. In the event of an audit, it may ask for your accounting records in electronic form. The IRS says this will save your and/or your accountant time because you won't have to print out your records.

Is the IRS just trying to be nice, or does it have an ulterior motive? Do you really need an answer? Of course, the IRS has an ulterior motive.

We're talking about giving the IRS a CD, DVD, or a flash/jump drive containing an exact copy of your original accounting back-up files. You can't create or reconstruct a new company file, for example, by re-inputting the transactions for only the year under examination. Nor can you provide an Excel spreadsheet.

The backup file is an exact copy of your original books of entry and allows the IRS to review and test the integrity of the original electronic records using the software program. For example: it can "drill down" to the underlying data and view individual transactions to see the date the transaction was originally created, dates of subsequent changes, what changes were made, and the username of the person who entered or changed the transaction.

A request is a polite demand, especially when made by the IRS. It is mandatory to provide electronic accounting records if you have them and the IRS so requests. If you refuse, the IRS can issue a summons for the records or disallow items for lack of substantiation.

The IRS says that its examiners will be requesting these files in the majority of cases where the taxpayer already uses electronic accounting software to maintain their books and records. However, if the audit is limited in scope, such as auditing one specific expense item, the examiner may determine that requesting the electronic accounting software file may not be necessary. In broader scope audits, such as when verifying gross income, the backup file will likely be requested by the examiner.

One way to avoid having to give the IRS electronic files is not to keep any. You, or your bookkeeper, can always do your books the old-fashioned way--by hand. This may sound primitive, but it worked just fine for hundreds of years.

If you continue to use accounting software, be aware that any entry you make could potentially be reviewed by the IRS. Many small business owners who create their electronic records themselves make a mess of it. Providing the IRS with a copy of incomplete or incorrect records could end up prolonging an audit. So, whatever accounting system you use, do the job right.

January 2013

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