Paul L. Caron

Friday, May 27, 2011

WSJ: IRS to Small Business: 'We Want Your QuickBooks'

Quickbooks Wall Street Journal, Small Businesses Fight IRS Over Data, by Laura Saunders:

The IRS, moving aggressively to collect more taxes from small businesses, is telling companies being audited to turn over exact copies of the electronic records kept in their business-software programs, according to a letter from an agency official to the American Institute of CPAs.

The accounting group fears this will force small businesses to turn over customer lists, personnel data, confidential client information and other unrelated information often contained in the off-the-shelf software programs many businesses use to manage all aspects of their finances.

Small-business groups are beginning to push back, saying the agency shouldn't treat small firms like bigger businesses, which usually have elaborate accounting systems and are able to give the IRS only the data the agency seeks. Small businesses, defined by the IRS as those with assets of less than $10 million, often use one off-the-shelf software program such as QuickBooks or Peachtree. A spokesman for Intuit said the Mountain View, Calif., company "was aware that the IRS has purchased copies of small-business accounting software to use in its tax audits." The IRS declined to comment.

"Many accountants are worried this could lead to fishing expeditions" to find problems beyond the scope of the requested information, said Danny Snow, a certified public accountant in Memphis who is active in the American Institute of CPAs, or AICPA. "It's not like what the IRS asks of large companies."

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Intuit needs to earn its money and work with the IRS to come up with an approved subset of all the data stored in QuickBooks and write an export feature to just save that subset.

Posted by: John Davies | May 27, 2011 7:52:15 AM

No problem. Just go back to the old way of a general ledger on a spread sheet with pencils, erasers and calculator.

Back in the stone ages, I used to be the head bookkeeper in a rather large small business which employed 15 people, manufactued a product (lumber) and also operated as a retail establishment for lumber and building products. We had NO computer programs like Quickbooks or Peachtree available. Lotus was in its infancy.

We were able to handle problemo. It just took more time and employed a couple of people to do the bookwork.

Posted by: DPW | May 27, 2011 7:56:20 AM

I don't like this at all, but the IRS could never figure out some of the messes that my clients create in QuickBooks. The IRS needs to stick with requesting only pertinent information for the audit.

Posted by: Woody | May 27, 2011 8:27:24 AM

This is _such_ old news; the IRS has been gearing up to utilize Quickbooks data sources for more than two years. Guess it becomes news when the WSJ wakes up.

The interesting part, when you talk to both tax specialists and IRS revenue agents, is that many small business people are happy to have the IRS take their QuickBooks files - just to get the audit review done and over with. It becomes an efficient way to conduct the audit for both sides - at least for those with nothing to hide. Those with messy books - or something to hide - certainly should be concerned. But it was ever thus.

That said, there is a need for real and appropriate limits on what the IRS gets: the year under investigation only; no client or supplier lists, etc. The folks at QuickBooks could help a lot by allowing customers to better segment and secure the data they provide; tight now the files is just one big happy furball of data, which makes for happy hunting grounds for revenue agents.

Posted by: CT_Woods | May 27, 2011 8:41:55 AM

This is one of those government intrusions that causes company product managers to dance with joy. With publicity like this (an Instalanche pointing to a Wall St. Journal article) you can bet that strongly-encrypted data files have just become a feature of the next version of Quickbooks. Cha-ching!

Posted by: John Murdoch | May 27, 2011 9:12:22 AM

Small businesses don't have the lobbyists and campaign contribution capabilities of large companies. So we get hosed.

Its okay for GE (and the entire list of publicly traded firms) to arrange their books so that they pay no income taxes. Not so for the engine of economic growth - small businesses.

Its okay for the US Treasury Secretary and legions of bureaucrats, public officials, lobbyists and lawyers to cheat on their taxes. Not so for the engine of economic growth - small businesses.

Tax authorities pick on small business for one and only one reason - they think they can. But then they wonder why there is no economic growth. And to raise revenue in the face of a smothered and strangled small business growth engine, they tax 'the rich' (being sure to hiss that phrase through gritted teeth. I'd think they were stupid except that they know exactly what they're doing which makes them lying cynics along with having marginal intelligence.

Its okay to subsidize dead insustries (autos, agriculture, public education, real estate and home construction) so long as they have a donor constituency.

This is why voters, citizens and taxpayers hate their government and its 'representatives'. They 'represent' only a slight-of-hand kleptocracy.

Posted by: Robert | May 27, 2011 9:16:42 AM

Would small business owners be able to invoke the 5th Amendment over this?

Failing that I can see Intuit and other software developers writing accounting packages that can keep financial data separate from customer and personnel data. Mustn't give Big Brother any more information than what is necessary.

Posted by: Ralph Gizzip | May 27, 2011 9:42:00 AM

The problem with giving the government too much power is eventually it begins to think that it can do anything it wants.

Imagine that.

Posted by: Chris Bolts | May 27, 2011 10:36:58 AM

I am cpa that handles numerous tax audits. The IRS is not entitled to the quickbooks data file and most IRS auditors know that they are not entitled to the data file.

Posted by: Joe | May 27, 2011 11:22:35 AM

Their boss can't handle TurboTax; why should we give them this?

Posted by: weimerrj | May 27, 2011 4:04:57 PM

Guess what. That new business I was considering starting will not happen. Sorry, not when the jack-booted thugs of the IRS wants to go on fishing expeditions.

Good luck getting the economy to grow doing this.

Posted by: Dr. Bob | May 27, 2011 5:13:49 PM

Joe, no one who does what you claim to do is that naive.

Sure, they aren't entitled to it.... unless you are comfortable with the idea that every ambiguity will be resolved against the auditee.

Posted by: SDN | May 27, 2011 5:39:19 PM

and if such things are subpoenaed the conduct is this: produce the material in the subpoena and give/surrender them to no one, you cannot be required to give testimony against yourself. period
been there, done that, at grand jury, no judge so for will walk on that one

Posted by: Sam | May 27, 2011 6:34:48 PM

@John Davies - the IRS is using several accounting packages to audit small biz. We have a team at Intuit examining the situation. While I don't have the results, they're working to find the best solution for small biz owners. Meanwhile, tax pros can find info on LinkedIn and Yagoo groups on how peers are responding to IRS requests for QB and other accounting package files. I hope this is useful for the time being. Best, Lisa K., Intuit

Posted by: Lisa Kerr | May 27, 2011 10:22:32 PM

I don't have quickbooks. I have a cottage business that makes less than a certain amount in the year. Screw the IRS. They'll get a return from me when they show that GE paid their taxes.

Posted by: Donnie J | May 28, 2011 4:21:35 AM

Re. "just give IRS the books if you have nothing to hide": I have 20 years representing taxpayers first as a CPA and as a lawyer in both civil and criminal matters. A client may well have "nothing to hide", but doesn't want the Revenue Agent spending ANOTHER six months going on a fishing expedition to find or manufacture adjustments far outside the scope of the exam and disrupting a small already understaffed office (and likely drinking all the coffee and using all the toilet paper).

As a matter of course I REGULARLY refuse excessive, overly broad document requests, period. The fact my client would have to pay me to pre-review the ENTIRE QB file alone is sufficient grounds. I also point chapter and verse, with citations, to the Code, Regs., and IRM provisions concerning examination scope and record requirements. The IRS is NOT entitled to the QuickBooks file in a limited scope examination, for example.

Refusal should be done politely and professionally, and by putting the oneous back on the RA AND his or her manager to provide contrary authority. They will take one look at the work involved and say, "Sorry to have bothered you," knowing full well they have not a leg to stand on and would have to involve District Counsel regardless.

This is not another "bash" the IRS post. But let's be honest, there is no reason to need the QuickBooks file UNLESS the IRS agent wants to go on a fishing expedition. Such a request is particularly concerning in a limited scope examiantion, where the RA is usually only looking at one particular form or set of transactions.

A recommendation (or word of caution) to CPA's and attorney's who do not litigate: the threat of being able to go to court is very powerful, even at the exam level. Collaborating with a tax litigation attorney at least as a "face" in an SMB exam will do wonders to change the tune of a difficult RA or manager. Moreover, refusing to provide an IDR response must be done properly so as not to jeopardize your client's right to recover attorney's fees and shift the burden of proof if litigation results. Every CPA and limited exam /controversey professional (including lawyers) should learn those rules and / or consult a tax litigator. This is very powerful, because even though exam technically cannot consider litigation risk, Appeals and certainly District Counsel can.

Posted by: ChiTownTaxLawyer | May 28, 2011 10:40:33 PM

Giving the IRS agent a copy of the data file would be a disaster. For example, I often use a feature of QB or Quicken in non-standard ways, usually to simulate a feature it doesn't have or to make certain tax and asset calculations easier to handle. If you look at that and don't understand exactly what I'm doing and why you'll come to the wrong conclusions about what the books say.

Posted by: Bob Smith | May 31, 2011 7:20:13 AM