Using Electronic Accounting Software Records in Examinations

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					    Using Electronic
 Accounting Software
Records in Examinations

     Stakeholder Liaison Todd Cresci
     Small Business/Self-Employed Division
     Date: Fall/Winter 2011
            A little history…
• 1971 - IRS began using electronic records
  during examinations
• 1971 through early 2000 - generally only large
  businesses maintained books and records
• 2008 - Customers requested use in SB/SE
  examinations as accounting software programs
  had become common practice
• 2009/2010 - Ability to utilize different accounting
  software programs began…and continues…
 Benefits of using electronic
    accounting records
• Reduces burden
   – records provided electronically, instead of
     time & cost of copying paper records
   – provides a complete set of the taxpayer’s
     accounting records, decreasing the number of
     items included in the initial document request
     and follow-up requests.
• Increases efficiency of analysis and testing of
  the books and records.
     Authority to request

• IRC § 7602(a)(1) grants the Service the
  authority to examine any books, papers,
  records, or other data which may be
  relevant or material to an inquiry.
• IRC § 6001 provides that taxpayers
  must keep records as the Service
 Authority to request cont.

• Rev. Rul. 71-20 advises electronic
  records are records under IRC 6001

• Rev. Proc. 98-25 requires taxpayers
  with more than $10 million in assets
  to maintain electronic records
     Requesting electronic
• Examiners will request electronic files in
  the majority of audits
• Form 4564, Information Document
  Request, will be used to request:
  – Copy of original electronic accounting
    software backup file
  – Administrator’s username & password
• Backup file provided on CD, DVD, or a
  flash/jump drive
    What about security of
    sensitive information?

• Security and privacy of taxpayer data is
  the IRS’s highest priority
• Sensitive information is protected by strict
  federal disclosure laws
• IRC Section 6103 prevents IRS from
  making unauthorized disclosures
  What about transactions
  beyond year under audit?
• IRS will only review data that is relevant to
  tax year(s) under exam.
  • This may include reviewing transactions from
    month prior to and after tax year or tax
    periods before and after, if transactions in
    those timeframes are relevant to the data
         Archiving old data

• Many accounting software programs allow for
  condensing/cleaning up of old data
• This is permitted for dates prior to years under
• If scope is expanded, may request another
  backup created prior to condensing
• IRS needs a copy of the original data to test the
  integrity and veracity of the accounting records.
        Resources on
Search using the search word “recordkeeping” and
you’ll find:
• Web pages with guidance and tips
• An audio file
• Publication 583, Starting a business and keeping records
• Tax Topic 305 – Recordkeeping
• SB/SE Stakeholder Headliner Volume #303, IRS Accepts
Taxpayer Accounting records in electronic Format for Small
Business/Self-employed Examinations
• Frequently Asked Questions and Answers

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