IRS Tax Audits, Accounting Software and Client Confidentiality
In late October, Gary Leeman, CPA received numerous inquiries pertaining to client confidentiality related to IRS tax audits. A member of MACPA’s Professional Ethics Task Force, Leeman researched the issue with the Task Force, as well as through contact with the AICPA Tax Division in Washington, D.C.
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Editor’s Note: Read IRS – Getting More Serious About Using Quickbooks Files in Small Business Audits in this issue of Leaders’ Edge to learn more about the IRS’s legal authority and long-standing use of electronic records in audits, plus five tips on responding to their requests for small business accounting files. |
Leeman reports that during income
tax audits, IRS field agents are requesting
discs or USB drives that contain
complete information of the accounting system of the business undergoing a
tax audit. These files often include information for more than one tax year.
Additionally, the software used by the company being audited provides an
audit trail within the information system. The IRS is attempting to
determine if
the audit trail indicates any abnormalities.
With more than one tax year on a disc, the potential is created for an IRS
agent to look at a tax year that is not under audit, be it an open year or
not.
The IRS has stated that field auditors are not necessarily going through the
data. Rather, an IT person would most likely do so, since the auditor isn’t
the individual doing the data mining.
The IRS is not backing off from the program, despite concerns expressed by
the profession including the AICPA Tax Division. It also appears that agents
are being educated on software programs such as Quickbooks, said Leeman.
Accounting software companies have been contacted, with the intention of
establishing a forum to encourage the development and marketing of software
that lawfully limits the span of data under scrutiny.
CPAs Role
How does a CPA meet the ethical requirements of the profession so as not to
violate the rules of confidentiality?
Part of the answer rests with the IRS’s ability to subpoena the information.
At this point in time, there has been no court case challenging the IRS’s
right to obtain the discs.
CPAs should explain to their clients the potential ramifications of not
providing a disc containing either multiple year or available audit trail
data. As in other non-attest engagements, the client will make a decision
based upon the information provided by the CPA. The potential difference in
this situation is that the client could wind up in court as a result of the
IRS pursuing its right to subpoena the information.
The CPA should also explain to the client that if the client voluntarily
provides the information requested, additional years other than the tax year
being audited could be reviewed. In addition, the company’s software audit
trail would be subject to scrutiny for any abnormality.
This issue is still evolving. However, until each year is completely on its
own, and the audit trail issue is lawfully eliminated, potential problems
from this situation could continue into the year 2015 based upon tax return
due dates for the year ending Dec. 31, 2011.