Earlier this year the IRS announced that it would begin demanding a business’ QuickBooks data file during all future audits conducted by the agency. In the past, CPAs and their clients would often export the accounting software’s general ledger and other financial information to Excel, and then provide this information to the IRS during an audit, as a way to limit IRS access to non-accounting information. IRS was satisfied with this until recently when it began to realize the wealth of information that is contained within a company’s software data file – much of which may be unrelated to the year being audited, but may in fact reveal information that could be useful to IRS in evaluating information reported on tax returns.
The IRS has long regarded electronic records as being suspect: “Electronic records, are, in general, considered less reliable than their paper counterparts due to the ease with which they can be manipulated” according to the recently updated Internal Revenue Manual. Bingo. What is so helpful about having the QuickBooks file to audit is the existence within the file of an “audit trail” – a function which cannot be disabled by the users, and which records every keystroke by date, time, and user name. By studying this audit trail, IRS can determine whether transactions were altered, deleted, or modified, and how often, by whom, and when.
Many CPAs have expressed concern over this new approach because their clients routinely make errors in QuickBooks which have to be corrected after the fact. They were worried that IRS would regard these errors and corrections as indicative of deceit or fraud, when in fact they are only indicative of incompetence.
Enter the AICPA. Earlier this year, the AICPA sent a memo to IRS asking for their clarification on their position regarding providing “an exact copy of the original electronic data file…and not an altered version” to IRS auditors. The AICPA wanted to know whether such a file could be condensed so as not to provide prior year data, but only the data for the year under audit, and whether CPAs are being exposed to potential malpractice claims by inadvertently turning over unrelated data contained within a client’s QuickBooks file. Some CPAs have gone ahead and either condensed the QuickBooks file or had a software company perform a “redaction” of the file, to remove prior year information. Anecdotal evidence indicates that this is okay with the IRS, however, it has yet to officially comment on the AICPA’s questions.
So far, the IRS is only training its auditors on the use of QuickBooks and Peachtree during an audit, but it may expand its training to other software packages if it sees a need. Since QuickBooks has the market share, with a reported 85% of the total, IRS was smart to choose QuickBooks as its first software package to use in its new approach to auditing electronic records.
Now you can count the IRS as yet one more reason not to use QuickBooks. But, if you are already using QuickBooks or Peachtree and you are about to be audited, but sure to contact your CPA so that they can help you in providing only the information that IRS is entitled to receive during the audit, and nothing more. And, since QuickBooks is kind enough to provide you with an audit trail, make good use of it by strictly adhering to user log-ins and passwords for each unique user of the system.