IRS Takes a Closer Look at Quickbooks

By Mitchell K. Simon
CPA

You may have thought that using QuickBooks for your business would help keep Uncle Sam at bay. But you should know that the IRS is now training agents to be more competent in auditing accounting records that use QuickBooks. The Service has provided agents copies of the software program so that they can become proficient at using it for accounting.

Upon review of the information provided the agents, the IRS will evaluate the audit trails and the reliability of the records. If requested by the IRS, the taxpayer is required to provide the electronic records – which means a copy of the taxpayer’s software backup file. IRS regulations, which have been upheld in court, give the agent the authority to examine electronic records.

The QuickBooks audit trail will provide the dates of the transactions, subsequent changes and identify the person who entered or changed the transactions, essentially providing a history of when changes were made and who made the changes. This review could also have an effect on prior and subsequent year records. The IRS can consequently determine the reliability and internal control of the accounting records.  Upon the evaluation of the accounting records, the Service can come to the conclusion as to credibility of the accounting records and the perceived bookkeeping errors and the tweaking of the records.

You should be aware that if the audit trail has been turned off, it could give the impression of attempting to hide transactions and increase the agent’s suspicions. If you decide to condense transactions for non-audit years, make sure you discuss with the IRS agent before providing the backup files. You need to be clear what date you are submitting. The backup files should also include any utility programs that are integrated with your QuickBooks. The IRS considers the use of these kinds of software products as part of your software records.

Errors and corrections in the use of QuickBooks is common for many users of the program. Make sure your internal controls are effective and you are using professional advice in the recording and use of your records.

Upon an IRS request for an audit, contact your CPA. You will then have to give him power of attorney to talk the IRS about the period in question. Once your representative has talked with the Service, he can meet with you and discuss your QuickBooks and the IRS request.

Mitchell K. Simon, CPA, is president of Mitchell K. Simon, P.C. in Farmington Hills. He has been a Certified Public Accountant since 1973, specializing in tax and accounting services for small business. Visit www.MitchellKSimon.com or call (248) 737-0820 to learn more.