Scott is a senior high-tech executive with more than 30 years of experience in cybersecurity and the broader software industry; serving both the public and private sectors.
Why is the IRS using electronic accounting records instead of continuing to use Picnic audit paper books and records in examinations?
Electronic information management has become the standard in the private sector and is now being used to enhance the IRS examination process. Obtaining accounting records in electronic format provides significant advantages: How and when will the IRS request electronic accounting software records?
IRS will also request the administrator's username and password, as they are needed to read most data files.
E-mail must not be used to transmit electronic records to or from the IRS, a taxpayer, or their representative, to ensure security. What is the IRS doing to address concerns about sharing the accounting software administrator's username and password for the audit?
The taxpayer can preserve any favorite password by changing the administrator's password to a Picnic audit one, such as "IRS Audit. The temporary password must have administrator access to the backup file provided because the IRS needs to have the same access levels Picnic audit the administrator.
If the examiner does not have the administrative password, he or she will not be able to read the data as needed for the examination.
What if a taxpayer uses an accounting software program that is not readable by the IRS?
At this time, IRS has the ability to accept and read data files from accounting software programs that are used by most business taxpayers. Taxpayers should consult with the examiner before submitting any type of electronic files. Whenever possible, the IRS will work with the taxpayer and their electronic accounting records to reduce the number of information document requests IDR's.
However if the examiner is unable to read the electronic accounting records, he or she will determine the best course of action to complete the audit in a timely, efficient manner. Now that IRS has the ability to accept electronic information from accounting software programs, will backup files be requested in every examination where the taxpayer uses those programs to maintain their books and records?
Using electronic records to conduct examinations should make the audit more efficient for everyone. Examiners will be requesting these files in the majority of cases where the taxpayer already uses electronic accounting software to maintain their books and records. However, if the audit is limited in scope, such as auditing one specific expense item, the examiner may determine that requesting the electronic accounting software file may not be necessary.
In broader scope audits, such as when verifying gross income, the backup file will likely be requested by the examiner.
The professional judgment of the examiner and his or her manager will be used on a case by case basis to determine whether it is appropriate for a particular examination.
How will the electronic data be used? Most accounting software programs can generate a large number of pre-set reports. Each report can be modified to fit the examiner's needs.
When working with these reports, the examiner can "drill down" to the underlying data and documents to further investigate items, as appropriate. The software also allows the examiner to test the integrity and veracity of the accounting records in making a determination as to the reliability of the records for examination purposes.
However, the examiner may still need to request other documents when such records are necessary to properly test a return item or issue.
What is the IRS's legal authority for requesting electronic files and other relevant accounting records? How does Revenue Procedure impact the IRS' authority to request electronic records from small business taxpayers?
The legal authority for requesting accounting records in electronic format is based on Internal Revenue Code section aInternal Revenue Code sectionRegulation 1. Note that, although Revenue Procedure exempts certain taxpayers from the requirements of the Revenue Procedure, this does not create an exemption for any taxpayer from having to produce electronic books and records if they otherwise exist when a business chooses to use an electronic accounting software program to maintain their books and records.
What if a taxpayer refuses to provide the IRS with an electronic accounting software backup file or any other type of electronic data file? Our tax system is set up in such a way that taxpayers fill out their own tax returns and are responsible for maintaining their own books and records.
Under Internal Revenue Code section and Regulation 1. Further, section a 1 grants the IRS the authority to examine any books, papers, records or other data that may be relevant or material to a tax examination.
Section a 2 grants the IRS the authority to summons the books and records. If the taxpayer has concerns with providing a copy of their original accounting software backup file, they have the right to discuss the matter with the examiner's manager.
What if the taxpayer's representative refuses to provide a copy of the taxpayer's electronic accounting backup file? If the taxpayer's representative chooses to decline to voluntarily submit the requested materials, the IRS has the right to summons the information and the representative could be in violation of Treasury Department Circular No.
Subpart B, section What if the taxpayer or representative agrees to provide a copy of the taxpayer's company backup file; however, rather than providing an exact copy of the original file they create a new file for the IRS? If the taxpayer or representative creates or reconstructs a new company file, for example, by re-inputting the transactions for only the year under examination, this new file does not satisfy the requirements or needs of the Internal Revenue Service.
The new or modified company file is not a copy of the books and records of original entry. The altered electronic file would not meet the requirements of the Information Document Request or a summons and the taxpayer's representative could be in violation of Treasury Department Circular No.
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