IRS audits and QuickBooks- Learn what you can do and what you need to know. Important year end to do's that will save you lots of grief.
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The IRS wants your QuickBooks Data File

 

     
What are the chances you will be selected for an audit?  Very low, in fact, less than 2-4% of tax returns are audited. And some of those audits can be handled through correspondence.

However, if you are selected for an in person audit, it is costly in terms of time and money. Starting with year 2010, the Internal revenue service has purchased 1500 to 2000 licenses from Intuit and will have one agent trained and licensed per group to assist the other revenue agents with their audit. This type of audit will result in greater taxes which come with greater penalties and interest.  Your best defense, now, against these types of future audits is to take the time to read this article and learn what the "hot" audit areas are for your business and employ best practices when you finish your year.

What's the big deal? 
If the IRS finds a mistake you made, they will assess penalty and interest on the late payment of taxes. QuickBooks makes it easy to run the reports required to quickly find errors and issues of tax avoidance. They can export your data to Excel and with a few clicks create tables of relationships analyzing your margins (difference between costs and revenue).  The more years of data you give them, the more questions they will have. Tthe more supporting documents you will need to dig up and the more likely you will have to pay more in taxes and penalties.  No business has the time to devote to compiling the paperwork needed to satisfy an IRS auditor.  However, you will have to find the time. 

How far back can the auditor go? Auditors can include returns filed within the last THREE years in an audit.   Generally, if a substantial error is identified, the IRS will not go back more than the last SIX years.   

Auditors are fully trained in your industry.  In fact, there are HOW TO GUIDES, for the newbie auditor to learn all about where the mistakes can be found in your tax documents.  Handing over the QuickBooks files means they can find many more mistakes in the same time allotted by their supervisor for the audit.  The reporting capability in QuickBooks makes their job easy! 

To learn what they will look for, click on your industry below
.

 

Audit Guides: 
Click on your industry and read what the IRS wants to know

 
  Architects, Artists and Art GalleriesAttorneys, Auto Body and Repair Industry, Auto Dealerships, Beauty and Barber Shops, Bed and Breakfasts, Business Consultants, ConsultantsCar Wash Industry, Carpentry/Framing, Cash Intensive Businesses, Child Care Providers, Commercial Banking, Commercial Printing, Computers, Electronics and High Technology, Construction Industry, Drywallers, Entertainment, Entertainment - Music Industry, Hobby-Loss Rules, Farm Hobby Losses, Farming - Specific Income Issues and Farm Cooperative, Furniture Manufacturing, Garden Supplies, Garment Contractors, Garment Manufacturers, Gas Retailers, General Livestock, Grain Farmers, Hardwood Timber Industry, Independent Used Car Dealer, The Laundromat IndustryManufacturing Industry, Masonry and Concrete Industry, Ministers, Mobile Food Vendors, Mortuaries, Oil and Gas Industry, PartnershipsPizza Restaurants, Coastal Waterways Industries, Poultry Industry, Reforestation Industry, Restaurants and Bars, Retail Gift Shop, Retail Liquor Industry,   Scrap Metal IndustryShareholder Loan, Sports Franchises
TaxicabsTobacco Industry, Tour Bus Industry, Trucking Industry, Veterinary Medicine, Wine Industry
Updated guides found on IRS website
 
     
So, you can see why you would not want the IRS poking around looking for honest mistakes that you made. Instead, giving them all the information they request just for the year in question will be the

Do I have to give the IRS my QuickBooks file?
YES, they can ask for your QuickBooks file, however, you should first work with your CPA. Have your CPA request permission to split the company data file and provide the file with just the tax year(s) in question.

Changes still to come? The jury is still out on whether the IRS can insist on a QuickBooks file that contains all your data.
ISSUE MANAGEMENT RESOLUTION SYSTEM of the IRS (IMRS) identifies nationwide trends in the reporting, filing and paying requirements that may indicate a need to change IRS processes or procedures. Tax practitioners concerned over how the IRS will limit access to years of data other than the year being audited is the focus of  IMRS Issue 11-0001433  .  Until there are rulings or clear cut regulations on this issue, consider providing the QuickBooks data for just the year(s) being audited.

How do I split the QuickBooks file for an IRS auditor?
For those of you who are not currently facing an audit, the following tasks should be completed each year
Upon the close of 12/31/xx, after reconciling your books and preparing all year end adjusting entries, when you give your CPA the QuickBooks file, set the closing date (company menu), then make a copy of your QuickBooks file and keep it in a folder called Tax Audit QuickBooks.  Rename your data file and add the tax year the file applies to.  For example ABC Company.qbw will now be ABC Company 2011.qbw.  Have your CPA give you a list of adjustments to make in your QuickBooks file, so that your QuickBooks will agree to the tax return. These entries need to be made in your everyday QuickBooks file AND in the Tax Audit QuickBooks file.

If you do get a request for an audit, you use the clean up utility under File menu > utilities> to condense data for the years
prior to the audit year in question.   Before you use this clean up utility, make a copy of the file and store safely in another location.

How we can help!

Starting with the 2012 edition, the condense feature has improved!  If you prefer to give the IRS only one year of information
2012 and later editions has a period copy, leaving all the transactions for a selected date range, including the audit trail, and removing the "
before and after activity.  You will need to reset opening balances for that period - we offer a service to perform this procedure. Call us for more information 800-216-0763. 


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If you prefer not to upgrade, and you need a file with data from within a specific date range, we offer a file separation service where we will extract all the transactions for one full year and put them into another QuickBooks file for you to present to the IRS or other third party.  Call 800-216-0763 and speak to one of our data transfer specialists for pricing.
The IRS can summon the electronic records that contain the metadata (user who created the transaction, date entered and a history of the modifications to the file),  this IRS Memorandum explains to what extent you are required to comply with the summons.

 
 

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