An open QuickBooks: IRS initiative grants access to copies of tax records.
"IRS Agent Jones."
"I'm here to ascertain and confirm that you've paid any and all internal revenue (axes you owe. Let's see your books and records all of 'em. And proof that you paid any taxes owed. Now, please!"
Sound far-fetched? Think the IRS has no authority to undertake such an initiative?
Yes, it Can
This does not happen in practice. However. those of you who believe the IRS lacks the authority to engage in such an activity should familiarize yourselves with Internal Revenue Code Sec. 7601. "Canvass of districts for taxable persons and objects."
The statutory authority for the IRS to engage in just such an activity is clear, so it should come as no surprise to a tax practitioner that the IRS may ask for all books, records and related evidence that a tax obligation was properly calculated and paid and that will include all financial and related records that may exist. Revenue Procedure 98-25 addresses IRS authority to request that type of data when it is maintained electronically.
The IRS recently purchased more than 1,000 copies of QuickBooks 2010 and intends to train more than 1.000 revenue agents and specialty tax revenue agents on obtaining from taxpayers full backups for business taxpayers' QuickBooks files in connection with certain in-person field audits.
The IRS has apparently started this program because many taxpayers do not maintain complete or sometimes any hard copy records.
Clearly, small-business taxpayers and their CPAs have to consider the impact of the program with respect to record-keeping and future examination processes and procedures. However, as the saying goes, "the devil is in the details." And until the IRS provides more definitive information with regard to the nature, scope and details of the program, any conclusions with regard to that impact is speculative.
Scope of Investigation: No Fishing
Part of the problem is that considerable information is likely contained in QuickBooks data files that pertain to years and potential issues that may not have been identified by the IRS as the subject of a given examination. Thus, many commentators express alarm that the IRS may engage in '"fishing" expeditions.
Some have implied that, by law, the IRS' scope is limited to certain years and issues. That is, once an exam has commenced with identified issues and periods, it cannot be expanded. That is not the case.
IRS Sec. 7605 does impose constraints on unnecessary examinations and generally limits examinations to one examination of the taxpayer's book and records for any given year. But, in the first instance, based on case law, taxpayers have not fared well in "unnecessary" contests and, in the second, the IRS need only inform the taxpayer in writing that an additional inspection is necessary.
"Limitations" that do exist with respect to issues and years under examination are imposed as a matter of IRS policy and are generally set forth in the Internal Revenue Manual, which contains policies and procedures for IRS personnel to follow.
It is important to note that the IRS has indicated that it does not intend to engage in fishing expeditions with respect to years and issues that have not been identified for examination, and has instructed revenue agents to look at information relevant only to the year under examination. Still, many practitioners have questioned whether revenue agents in the field will act in good faith and comply with the IRS' published position.
The irony should not be lost with respect to practitioners asserting bad faith on the IRS' part for engaging in fishing expeditions, but not accepting that the IRS may wonder if a taxpayer has a big record-keeping and reporting problem when the taxpayer raises objections to IRS access to the electronic database. Neither side has a monopoly on virtue.
Keeping on Task
If" the taxpayer and representative (the CPA) believes the revenue agent's request for the database is unnecessary, the representative should state such with the examiner and, if not satisfied, with the examiner's group manager specifically providing reasons for the taxpayer's position.
If the IRS dot's not. agree, taxpayers and their CPAs will have little defense, if any, to refuse requests for the QuickBooks data files. If they continue to believe that compliance is unnecessary or not in the taxpayer's interest, the taxpayer should be advised to consult with an attorney knowledgeable about possible objections pertaining to the production of documents for IRS.
When the electronic files are to be produced, the taxpayer and CPA should carefully review the database to identify potential questions and issues that may arise on examination and ensure that appropriate explanations and reconciliations may be provided to the revenue agent.
In this respect, attempting to recast, "clean up," or to lock out access to prior year data may be misinterpreted by a revenue agent as an effort to '"hide" something when its only' real purpose is to protect against prying eyes.
At the same lime, if a taxpayer or representative believes that an examiner is accessing information beyond intended scope of the examination, the matter should be discussed with the agent, the agent's supervisor and, if necessary, the territory manager.
In future years, the CPA should inform clients of the IRS' strategy with respect to QuickBooks and suggest that clients would be well-advised to work more closely with the CPA to ensure the contemporaneous accuracy and completeness of the books and records. In addition. CPAs should explore technology solutions and alternatives to ensure that multiple-year data can be isolated in the electronic records to provide the revenue agent with only electronic data with regard to the year selected for examination.
Kip Dellinger, CPA is senior tax partner at Kallman and Co. LLP in Los Angeles. You can reach him at firstname.lastname@example.org.
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|Date:||Nov 1, 2010|
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