In a departure from the IRS’ current practice of primarily using paper records in connection with a tax examination, the IRS will begin accepting records in electronic format. With the widespread use of accounting software packages, this change has both positive and negative implications for business owners. In the past, submission of electronic records was limited to the occasional Excel spreadsheet and PDF burned to a CD, and even then not all agents would accept such files. This change is in response to the many taxpayers and tax professionals who in recent years have requested the IRS accept electronic records.
The IRS has acceded to this request and is training approximately 1,100 revenue agents on how to use QuickBooks. It will not be long before they are trained on other accounting software products. These agents are now being encouraged by the IRS to accept the QuickBooks data file, as well as electronic records produced by other accounting software. QuickBooks will be first, with more to follow, which may eventually lead to the savvy IRS agent sitting in the taxpayer’s office logged into Deltek or Timberline.
The IRS cites three benefits:
- Reduction of taxpayer burden, since documents do not have to be printed
- IRS gets the taxpayer’s books in their entirety, substantially reducing the IRS’ additional requests for information
- Speeds up the examination due to revenue agent’s increased efficiency gained by electronic records
Those that clamored for this change, however, may have been shortsighted. With the IRS now getting the entire data file, the real benefit to the IRS is that they have access to everything – not just information for the year under audit, and not just certain parts of the books, but absolutely everything that data file holds. The opportunity for an agent to go on a fishing expedition has just gotten a whole lot easier, so taxpayers should be aware of the possibility the IRS will obtain their entire accounting data file, and to that end to be cautious as to how transactions get recorded and what annotations are made. Needless to say, sufficiency of records to support each item shown on the general ledger is still required.
A little information goes a long way. This is a complex, new issue and we encourage you to call our knowledgeable tax controversy experts at 301.231.6200 to learn more about proper substantiation for deductions and how to appropriately use electronic annotation with your current accounting software package.
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