IRS verification

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With this new move from IRS to summon Quickbooks data base file it is a need to maintain quickbooks file error free and upto date or else face penal action from IRS.

IRS has found that many taxpayers do not save hard copies of their records or the copies they have are incomplete. The Service also found that taxpayers reuse an old version and over write the prior year. The examiner may request the data base to verify the integrity of the internal controls. A definite problem could arise where a client thinks they have turned off the internal audit feature to avoid tracking of adjusting entries but the program does not totally delete these items.

If the qualified representative (power of attorney) considers the Revenue Agent's request for the data base as totally unnecessary, he/she should speak to the agent's group manager. But as experience has shown, once a Revenue Agent discovers the taxpayer uses QuickBooks, the Agent will almost always deem it necessary to have a copy of the database. If the taxpayer/representative refuses to provide the data base and the revenue agent/manager determines it necessary, a Summons to obtain the information would be issued.

While Rev Proc 98-25 provides the authority for the IRS to request electronic records, in most cases (with exceptions), the Service will generally request the data file if some sort of electronic system was used. It is indeed up to the agent's and manager's judgment at the group level to make the request.

Rev Proc 98-25

TSection 6 – Documentation

The Taxpayer must maintain and make available to the Service upon request documentation of the business process that :

  • Create the retained records
  • Modify and maintain its records
  • Satisfy the requirement of Section 5.01(2) of this revenue procedure to support and verify entries made on the taxpayer's return and determine the correct tax liability
  • Evidence the authenticity and integrity of the taxpayer's records

The documentation described in Section 6.01 of this revenue procedure must be sufficiently detailed to identify :

  • The functions being performed as they relate to the flow of data through the system
  • The internal controls used to ensure accurate and reliable processing
  • The internal controls used to prevent the unauthorized addition, alteration, or deletion of retained records
  • The Charts of Accounts and detailed account descriptions

With respect to each file that is retained, the taxpayer must maintain, and make available to the Service upon request, documentation of :

  • Record formats or layouts
  • Field definitions (including the meaning of all "codes" used to represent information)
  • File descriptions (e.g., data set name)
  • Evidence that periodic checks (described in Section 9.01(3) of this revenue procedure) of the retained records were performed to meet Section 9.02(1) of this revenue procedure, if the taxpayer wants to take advantage of Section 9.02 of this revenue procedure
  • Evidence that the retained records reconcile to the taxpayer's books
  • Evidence that the retained records reconcile to the taxpayer's tax return

The system documentation must include any changes to the items specified in Sections 6.01, 6.02 and 6.03 of this revenue procedure and the dates these changes are implemented.

Section 7 – Resources

The taxpayer must provide the Service at the time of an examination with the resources (e.g., appropriate hardware and software, terminal access, computer time, personnel, etc.) that the District Director determines is necessary to process the taxpayer's machine-sensible books and records. At the request of the taxpayer, the District Director may, at the District Director's discretion

  • Identify the taxpayer's resources that are not necessary to process books and records
  • Allow a taxpayer to convert machine-sensible records to a different medium (e.g., from mainframe files to microcomputer diskette(s)
  • Allow the taxpayer to satisfy the processing needs of the Service during off-peak hours
  • An ADP system must not be subject, in whole or in part, to any agreement (such as a contract or license) that would limit or restrict the Service's access to and use of the ADP system is maintained), including personnel, hardware, software, files indexes and software documentation

Nothing strikes fear in the hearts of people more than receiving an IRS Audit letter in the mail. Audits take significant time away from the business and family, requiring taxpayers to gather mounds of records substantiating each and every item reported on the tax return and develop a comprehensive understanding of tax law.

The IRS leaves no stone unturned in its mission to determine the accuracy of the tax return. If taxpayers don't comply with the Auditors' wishes, the IRS will recalculate the tax and send home with a hefty tax bill as the parting gift.

Many taxpayers decide to handle a tax audit themselves, and discover they may have been "penny wise," avoiding a representative's fee, but "pound foolish," because they received a substantial bill for a significant tax deficiency.

IRS Auditors are trained to extract more information from taxpayers than they have a legal obligation to provide. IRS Auditors know that most people fear them and are ignorant of their rights. As a result, they know they can use that fear and ignorance to their advantage.

Rarely do taxpayers even have to talk with the IRS. CPAs handle it all for taxpayers so that their clients need not take time off of their business or job to handle the bureaucracy and paperwork of the IRS. No lost wages or business. They simply forward notification of an audit to CPA and CPA handles it from A to Z.