IRC §6001, Regs §1.6001-1(a), Rev. Rul. 71-20, and Rev. Proc. 98-25, give the Internal Revenue Service a great amount of latitude in requesting electronic financial records from taxpayers. Regs. §1.6001-1(e) requires a taxpayer to make these records “at all times available for inspection by authorized Internal Revenue Officers or employees, and shall be retained so long as the contents thereof may become material in the administration of an Internal Revenue Law.”
The IRS announced that it was expanding its audit capabilities in October 2010, partially at the request of tax practitioners during an IRS focus group, by training agents to be capable of auditing information from files of accounting software commonly used by small businesses. The IRS has trained 1,100 Revenue Agents, and has given those agents copies of the most popular computer accounting software to become familiar with. In addition, the IRS has encouraged Revenue Agents to begin requesting electronic files from taxpayers.
In U.S. District Court (Rouse No 8:11-MC00046-T-24AEP(M.D. Fla 6/27/12)) the IRS won in a summons enforcement case. The Service had requested a taxpayer’s QuickBooks backup files, and the taxpayer refused to comply. The IRS enforced the summons. Citing IRC §6001 and §7602(a) the judge ordered the taxpayer to turn over the records to the Service. The judge concluded that the IRS had met the “good faith” requirements for enforcing the summons under Powell, 379 U.S. 48 (1964). According to the judge, “A plain reading of 7602 reveals that the IRS may ‘examine books, papers, records, or other data which may be relevant or material to such inquiry…’” The Court found that “other data” under § 7602 included electronic back up files.
According to the Journal of Accountancy, “some practitioners are concerned that taxpayer adjustments in business software files may raise red flags with the IRS unnecessarily, requiring more time and expense to explain them.” The main concern is that the IRS may perceive corrections of bookkeeping errors in the electronic files as attempts by the taxpayer to manipulate books and records.
In May of 2012, the IRS modified the Internal Revenue Manual, to provide guidance to Revenue Agents on how they should evaluate taxpayers’ electronic books and records. In describing “electronic books and records,” the IRS used a broad definition which included taxpayer websites, e-commerce activities, and Web marketing material, which the IRS states is useful for tracing income, such as e-payments.
From this new stance of the IRS, it appears that you cannot deny the service access to your electronic records.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, and Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle.