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
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
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
Click on your industry and read what the IRS wants to
Artists and Art Galleries, Attorneys,
Body and Repair Industry,
Beauty and Barber Shops,
Bed and Breakfasts,
Car Wash Industry,
Cash Intensive Businesses,
Child Care Providers,
Computers, Electronics and High Technology,
Entertainment - Music
Farm Hobby Losses,
Specific Income Issues and Farm Cooperative,
Hardwood Timber Industry,
Independent Used Car Dealer,
Masonry and Concrete Industry,
Mobile Food Vendors,
Oil and Gas
Coastal Waterways Industries,
Retail Gift Shop,
Scrap Metal Industry,
Tour Bus 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
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
just the tax year(s) in question.
Changes still to come?
The jury is still out on whether the IRS can insist
QuickBooks file that contains all your data.
ISSUE MANAGEMENT RESOLUTION SYSTEM of the IRS
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
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
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
Download the current edition of QuickBooks now
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
explains to what extent you are required to comply
with the summons.
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