Tuesday, November 15, 2011


The Commissioner of the Small Business and Self Employed division spoke on initiatives that the IRS is taking especially the new requirement to turn over your software files if you are audited.

The IRS now can request backup copies of your software.

This is going to give them access to entries not only to your books but also it will allow the auditor to look at adjustments and changes that were made to your books by looking at the audit trail.

This is concerning. Think about yearend adjustments that are made when cleaning up the books and then when doing tax planning. The auditor is going to see those changes and will be asking questions.

Here is an example: Assume the owner of the business takes money from the business during the year. The bookkeeper classifies this as a loan. After the yearend we are looking at the transactions and determine that this actually should have been a dividend. On March 1st of the subsequent year we either make an entry or reclassify the check. The auditor is going to know about the entry through the audit function and think that we are doing some "hankie pankie" post yearend planning.

Here are some of the questions and answers addressed by the panel from the IRS:
Is this legal?
A. Yes. We have been to court several times and in all cases the judge has ruled that we should have access to the electronic books because they are the books of original entry.

Q. Could we turn off the audit function?
A. Yes but that would make us suspicious and would probably extend the audit. What are you trying to hide?

Q. What if the client uses QuickBooks as a checkbook and then the accountant takes the QuickBooks and makes entries. Can they still request?
A. Yes

Q. If the auditor has the books can he look at prior years? If he is looking at prior years he is supposed to open an audit for those years. Will they be looking at those years?
A. We have told the auditors during training not to look at prior years.

Q. HERE WAS MY QUESTION. Many clients have point of sale software that keeps track of transactions and inventory along with accounts receivable but is not downloaded into the general ledger. Is this type of software subject to review?
A. Yes. This is considered part of the books of original entry and is subject to request.

Q. What if the electronic books are kept by the accountant. Can they still be requested or subpoenaed?
A. Yes.

Because of this new initiative by the IRS we are going to have to be more diligent in our recording into QuickBooks and other electronic software and be prepared to answer questions of why entries were made to change or to make journal entries after the end of the business year.