Posted in: Blog, Posted On: 10-02-2015, Posted By: stevenadmin

~~Your worst nightmare as a business has come true – the IRS has selected your tax return for audit.

Your chances of an audit are actually very low. Only 2 to 4% of business returns get audited per year. However, a growing concern, if your business is audited is the IRS's authority to obtain your QuickBooks files.  Why is this concern you ask. 

First, QuickBooks has made it simple for auditors to detect errors and mistakes in your accounting methods.

Second, QuickBooks can run specific reports that locate errors and questionable transactions that may point to tax avoidance. QuickBooks also runs comparisons reports across multiple tax years, so that financial relationships can be analyzed, such as margin numbers from year to year.

Third, QuickBooks contains a history of all your accounting data, including years not necessarily covered by the audit notice.  This is a major concern for tax professionals representing clients in audits, because the more years of data that the IRS has, the more opportunity for them to find transactions that they can question.

Because the IRS has the authority to get your QuickBooks file we recommend our small business do the following each year:

First, consolidate your prior data.  This will prevent the IRS from fishing for information outside the scope of the audit notice.

Second, make a complete back up each year of your  QuickBooks file.  Name the backup “Law Office 2013”.  Again we do this so that the IRS cannot search for information outside the sccope of the audit notice.

Third, create a new company file “Law Office 2014”.

It is clear the IRS has authority to request your QuickBooks file.  There is a great article in the December 2011, Journal of Accountancy, regarding the IRS’ legal authority to obtain electronic records.  Here is a link to that article.  http://www.journalofaccountancy.com/issues/2012/jan/20114540.  What we don't want is to give them more information then they are entitled too.

Should you have any questions or concerns please do not hesitate to give us a call.

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