Making a Federal Case out of it

Federal District Court Upholds IRS Summons Authority of Accounting Software File

Some CPAs and other tax professionals have taken the position that the IRS does NOT have the right or authority to request the entire accounting software file of a small business under examination.  In essence, IRS Agents are requesting a full, working back up file of the client’s QuickBooks or Peachtree accounting data.  As many proficient QuickBooks and Peachtree users know, the back up data contains detailed accounting transactions for multiple years and not just the year under examination. 

Nevertheless, the position of NOT providing that data file must now be carefully weighed against a recent Florida Federal District Court case which upheld the IRS’s right to summon the accounting software file of a small business under examination.  A link to the court’s finding is provided here.

http://www.aicpa.org/InterestAreas/Tax/Resources/IRSPracticeProcedure/DownloadableDocuments/Federal_District_Court_Case.pdf

Many CPAs have sought the advice of the tax practice section of the American Institute of CPAs (“AICPA”) to see if they should resist cooperating with an Agent when requests for QuickBooks data files are made. The AICPA’s official position is “clearly each IRS examination stands on its own based on the specific facts and circumstances of that audit and tax professionals should carefully consider the risks of not cooperating with the Service.”  Yawn.  Well, that doesn’t help much.

At Franty & Company, we have encountered this dangerous request countless times and have been able to avoid providing a full back up copy of the client’s QuickBooks or Peachtree data file by giving the Agent an Excel file containing all of the same information that could be pulled from QuickBooks or Peachtree. Essentially, we have exported the accounting data into user-friendly spreadsheets and provided that information to the agents in lieu of a full QuickBooks or Peachtree back up file. True, the Excel files only contain data for the year under examination but we believe that the information provided complies in all material respects with the Agent’s request. 

The results?  Well, so far, so good.  Our Excel file switch has satisfied the examiners and we’ve never had to provide a full QuickBooks or Peachtree back up file to any Agent.  However, with IRS making a Federal Court case out of this, our solution to the problem may come with an expiration date.  

We wish the taxpayer’s CPA in this Florida case had done what we do so that the courts wouldn't have gotten involved.  Give them the information in an electronic format and then keep your mouth shut.  Now that there's a federal precedent, an Agent familiar with this court ruling may not be satisfied with Excel files.  Let’s hope that’s not the case.

We’ll keep you posted so feel free to enjoy the coming weekend and the rest of your summer!