IRS will summon your Quickbooks file !!!!!
IRS will summon your Quickbooks file !!!!!
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
Section 6 Documentation
1) The Taxpayer must maintain and make available to the Service upon request documentation of the business process that:
(1) Create the retained records;
(2) Modify and maintain its records;
(3) 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; and
(4) Evidence the authenticity and integrity of the taxpayer's records
2) The documentation described in Section 6.01 of this revenue procedure must be sufficiently detailed to identify:
(1) The functions being performed as they relate to the flow of data through the system;
(2) The internal controls used to ensure accurate and reliable processing;
(3) The internal controls used to prevent the unauthorized addition, alteration, or deletion of retained records; and
(4) The Charts of Accounts and detailed account descriptions.
3) With respect to each file that is retained, the taxpayer must maintain, and make available to the Service upon request, documentation of:
(1) Record formats or layouts;
(2) Field definitions (including the meaning of all "codes" used to represent information);
(3) File descriptions (e.g., data set name);
(4) 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;
(5) Evidence that the retained records reconcile to the taxpayer's books; and
(6) Evidence that the retained records reconcile to the taxpayer's tax return.
4) 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
1) 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:
(1) Identify the taxpayer's resources that are not necessary to process books and records;
(2) Allow a taxpayer to convert machine-sensible records to a different medium (e.g., from mainframe files to microcomputer diskette(s);
(3) Allow the taxpayer to satisfy the processing needs of the Service during off-peak hours; and
(4) 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.
Corporate IRS Audit Procedures
In recent years, the IRS has shifted the focus of its audits to medium and large size corporations. Because of this increased scrutiny, it isrecommended to develop a strategy in the event of any corporation is the subject of an IRS audit.Effective management of an IRS audit begins with pre-audit planning. This requires a review of substantive, procedural, and administrative issues that typically must be dealt with during a corporate audit.Provided is the following checklist.
1. Pre-Audit
Once the IRS indicates that the corporation will be the subject of an audit, a pre-audit meeting with the IRS is required. This meeting will be used to discuss and hopefully reach agreement concerning key procedural and administrative matters with the IRS; determine the scope, depth, and time-frame of the audit; and establish lines of communications. One sought-after agreement concerns Information Document Requests (IDRs). If the IRS to agree to discuss, on an informal basis, all IDRs before they are actually issued, this will be an opportunity to voice objections to proposed IDRs that are irrelevant or overly broad. Make clear to the IRS; expect all requests for information and documents to be in writing and that will not be complying with oral requests. Following this meeting,write a letter to the IRS outlining each point of the pre-audit agreement.
2. Regular Communications With IRS
As the audit begins, set up regular meetings with the audit manager. At these meetings, discuss how the audit is progressing and any problems that might arise. These regular meetings can be particularly useful where the audit includes a number of IRS personnel with different specialties.
Arrange to schedule regular meetings at the beginning of the audit by meeting with the IRS' person in charge. Also ask for the names and identities (e.g., engineers, economists, attorneys, industry specialists) of all IRS personnel involved in the audit and for the name of that person's supervisor. There shouldn't be any problem making this request, once the Revenue Agent understands that taxpayer simply want to know who to go to when the agent is not available to answer our questions. This also puts the Revenue Agent on notice that, when necessary, the taxpayers go to the supervisor to settle any problems. Still, want to work directly with the revenue agent conducting the audit as much as possible, without involving the supervisor.
At this point, also decide which of the company's employees (if any) are to have direct communications with the IRS. Limit the IRS' ability to interview any employee. Also want to meet with those employees who will be in contact with the IRS, to discuss likely questions that the IRS will ask them.
3. Company Records
First check will be whether the company has an existing record retention agreement with the IRS for computerized records and, if so, whether the company is complying with the agreement. Make sure to investigate and review whether the company has a written agreement pertaining to certain hard-copy documents.
Next, to locate the records relevant to the audit and determine how to retrieve them. It is to the advantage to notify the IRS early on of any anticipated retrieval problems during this time, identify any missing or destroyed records and develop a strategy to deal with the missing information.
4. Information Document Requests
During an audit, the IRS can issue Information Document Requests (IDRs). Establish a procedure for handling IDRs including who should be served with IDRs and what is the response time. As IDRs are received, they should be documented, in writing, on the date received and how to be responded. Keep copies of every document photocopied by or for the IRS. Accordingly, do not give the IRS their own copy machine or permit them to bring their own copy machine on site. Instead make two copies one for them, and one for your records of all requested documents.
5. Time Frames
Ask the IRS for a projected closing date of the audit. The strongest weapon will be to control the statute of limitations. In most cases,it is found that clients' advantage to make it clear at the outset that unlikely to extend the statute of limitations and that the IRS must treat the statute as a very real deadline. If the IRS does request an extension of the statute of limitations, evaluate the request at that time. From experience, it is unlikely that is recommended any extension of the statute; if recommended an extension, it will only be to extend the limitations period on a six-month basis. This gives us the maximum possible control during the audit.
6. Miscellaneous Matters
There are other issues need to address prior to an IRS audit. Isthe power of attorney, to represent, on file with the IRS? Were any informal agreements made during prior audits? Have any continuing issues been settled previously by IRS Appeals office? Have the taxpayers secured company's trade secrets? Will the IRS have access to sensitive financial information? Will the revenue agents be on site and, if so, in what facilities and how will the company provide access for phone service, fax machines, etc.?
Review the results of prior IRS audits, to identify likely issues and to make note of any problems that should be addressed at the opening meeting. Also identify key issues by reviewing the IRS' own Industry Specialization Program and Market Segment Specialization Programs. Finally, analyze all likely issues and estimate the exposure in mapping the audit strategy.
Careful advance preparation can help reduce the scope of a tax audit or examination and can lead to a more favorable disposition. While, of course, a thorough understanding of the underlying facts and applicable law is a must, facility with the IRS procedures is critical to preserving a taxpayer's rights. This is a summary of some of the more important IRS procedural rules and guidelines governing civil1IRS examinations and audits, including: how returns are selected for examination; a brief description of the types of civil examinations; an explanation of the tools available to IRS examining agents and revenue agents; dispositions in IRS audits or examinations and, if necessary, where to seek relief from an unfavorable result in an examination or audit.
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