In what has become an aggressive strategy to collect every possible penny and dime in back taxes owed by small businesses, the IRS has begun asking for exact copies of electronic data files, and even copies of business software-programs. In a letter to the American Institute of CPAs, the Agency confirmed it was asking small businesses to provide such information during its small business audits.
According to tax lawyers the IRS defines a small business as one with assets less than $10 million dollars. Many of these businesses use off-the-shelve accounting programs like QuickBooks or Peachtree. A representative for Intuit (QuickBooks) said his company “was aware that the IRS has purchased copies of the small business accounting software to use in its tax audits.”
One concern shared by IRS tax attorneys and their small business clients is that the new IRS requests will force these small companies to turn over electronic data files containing customer lists, personnel files and confidential client information which may be unrelated to the government’s audit. Several small business groups and their tax lawyers are pushing back and telling the IRS their constituents/clients shouldn’t be treated like big companies. They argue larger companies typically have elaborate accounting systems which allow them to limit the amount of information they give IRS to only data actually needed for the audit.
For professionals operating small business, particularly doctors, psychotherapists and lawyers the problem is even bigger. Tax attorneys explain these small businesses are bound by legal and ethical proscriptions intended to protect confidences and privacy rights of their patients/clients. While the Agency defends its practice, by claiming the electronic data requests are intended to help the IRS modernize, that doesn’t really help professionals being thrown into a conflict between complying with IRS requests and their ethical and statutory duties to clients/patients.
One need only imagine the potential for abuse if the IRS were to audit a tax lawyer and ask for the firm’s electronic data files. What better way for the IRS to get information about possibly thousands of delinquent taxpayers and insights into their cases with the IRS? Never the less, Chris Wagner, Commissioner of the IRS’s Small Business/Self-Employed Division, takes the position that small business audits require “unaltered metadata” so that auditors may “properly consider the integrity and veracity of the electronic files.”
If you are a small business owner and have questions about an ongoing audit, or you just have concerns about how to best maintain your records for a possible future audit, go get answers from a tax attorney or other tax professional. While the final chapter on this debate hasn’t yet been written, and it is likely the Courts will ultimately be called upon to write that chapter, so getting the answers you need from a competent tax lawyer is likely the best strategy for being prepared.
Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212