The IRS and Electronic Accounting Records

One of the concerns many taxpayers have in an IRS audit is the request to turn over the backup files for their electronic accounting software such as QuickBooks. You have no choice but to comply with this request. The IRS has the law behind them on this request. Here are a couple of pointers from the IRS Q&A on Electronic Accounting Software Records.

  • You must provide them with an exact copy of the original backup files. Making any changes will smack of fraud. If you have a representative licensed to practice before the IRS who participates in making and producing the modified file, they could be in violation of IRS rules as well.
  • Downloading all the transactions to Excel and turning them over to the IRS will not work. They want an exact copy of the files.
  • The IRS can also request the data for the month before the audit period and the month after the audit period. If they find this information inadequate, they can expand their request.
  • You cannot close the accounting periods before the backup if it will condense the data. They want to see all the transactions, not totals.

Compliance with an IRS Records Request

Now here is an interesting question when it comes to electronic accounting records. The IRS’s latest pronouncement regarding these records was written in 1998 before web-based software became available.

I am a software developer and can tell you that almost nobody does backups to some sort of floppy disk anymore at the client level. As a provider of web-based software, we do automatic backups of the databases daily, but this is not the same thing as backups of a PC-based accounting program. The database backups generally overwrite old backups with all the information from the current database. What’s more, the accounting programs are completely separate from the databases that hold each individual client’s data. The program files pulling the data from the database have undoubtedly been changed many times to improve the input and report screens. There is no way to get back to the previous version from some years back.

If summoned, a web-based software provider can produce a file, but we don’t have a way to guarantee that the database is exactly what it was at the end of the tax year and you can be certain that the program files are not the same.  The result is that web-based accounting software files are not in compliance with IRS electronic records rules as they are written on the IRS Q&A.

Author: Jim Payne

Jim Payne, a Florida Certified Public Accountant (CPA) since 1976, offers candid insights on getting square with the IRS — with the least pain, and at the lowest cost — with (or without) the help of a tax representative. Mr. Payne is a former IRS agent and expert in business profitability, IRS audits, IRS payroll tax, and IRS non-filer issues. As a Tax Representative, his goal is clear: " I will speak on your behalf to all IRS agents, so you never have to, and I'll guide you in executing a strategy to resolve your IRS problem so you can get back to enjoying life."

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