IRS Auditor Requesting Quickbooks Backup

Our IRS auditor is requesting a full Quickbooks back up. This seems like more information than necessary to complete the audit. How would you approach?

Certain versions (2015 forward?) allow making a back up copy limited to the year under audit.

Previous discussion:

viewtopic.php?f=8&t=187&p=1818&hilit=QB+backup+QB+Quickbooks#p1818

My understanding is that the IRS is allowed to request and the taxpayer is required to produce the QB file. You may be able to negotiate a compromise, such as the general ledger for a certain period or something else the auditor will accept. This article discusses some of the issues:

http://www.journalofaccountancy.com/iss ... 14540.html

I just completed an IRS audit. The auditor requested the QB backup and I politely said 'no'. I supplied all ledgers and detail in Excel, but refused to provide the full QB backup because that provides unfettered access to all years and is well beyond the scope of the audit.

I didn't receive any pushback on this and the audit went very smoothly, in no small part because the client is incredibly organized. If their books/records were less organized, maybe it would have been more of an issue. I can't say.

Had a similar situation. We printed to PDF pretty much what you printed and it went well. Everything tied in and / or was organized enough to auditor's satisfaction; so, agree if it was messy, definitely would be different story.

IRS examiner I dealt with said IRS runs the file through some sort of testing regime after the audit appointment. I suspect possibly they are looking at the audit trail in QB to see if anyone cooked the books after the examination letter was received.

Whoa. Are they that good?

IRS examiner I dealt with said IRS runs the file through some sort of testing regime after the audit appointment. I suspect possibly they are looking at the audit trail in QB to see if anyone cooked the books after the examination letter was received.

That seems entirely possible to me. If my memory is correct the Quick Books Audit Trail feature has been "automatically on" for many years (versions of Quick Books).

Whoa. Are they that good?

With the Quick Books Audit Trail feature it is not that difficult to produce a report to determine what has been posted to Quick Books within a given date range using Audit Trail. The Audit Trail reports can then be exported to Excel for additional data mining.

I have used the Audit Trail feature on several occasions to help solve client data issues. (Most commonly when a client posts an entry to a tax year that has been filed and the retained earnings doesn't match at the beginning of the following year).

We printed to PDF, not giving them the whole file...

I'd be more concerned about being asked about entries I'd made 2-3 years ago! and trying to remember what I was doing and why....

I am just curious. Is it mandatory that the taxpayer has to be able to provide Quickbook records in times of an audit?

What will happen if it is a mom and pop business and they do not use Quickbook or any kind of accounting software for bookkeeping purpose? I have actually seen taxpayers who just totaled up each category of expenses from cancelled checks and invoices when they file their tax return.

So my question is: what direction an audit will be going if the taxpayer is not able to provide any computer records at all?

I use a trial balance software. Take last year's ending, add in net activity for current year, tie cash out and that's it. They need QB? Tough, don't use it.

I am just curious. Is it mandatory that the taxpayer has to be able to provide Quickbook records in times of an audit?[...]
So my question is: what direction an audit will be going if the taxpayer is not able to provide any computer records at all?

It's not mandatory for a business to use Quickbooks, but if it does, it is allowed for IRS to demand a copy.

Now, what if business uses QB Online, as that is the way Intuit is trying to force everyone to go? It doesn't seem reasonable that the business should have to grant online access to a production copy of the company's online bookkeeping system. There are some ways that one can theoretically save a desktop company file from the online system, but my limit attempts to work with this some time ago were pretty frustrating.

Here are some excerpts from a presentation made some years ago by an IRS employee:

"IRC § 7206(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 prescribes.

Revenue Rulings 71-20 and 98-25 • Require a taxpayer with more than $10 million in assets is to maintain electronic records.

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 sought.

Most accounting software programs allow "clean-up· of old data • This is permitted for dates prior to years under audit • If scope is expanded, may request another backup created prior to ·clean-up·• IRS needs a copy of the original data to test the integrity and veracity of the accounting records."

From a letter 4/20/2011 from IRS to AICPA:

"Similar to paper records, it is important an exact copy of the original electronic data file
be provided to the examiner and not an altered version. Only an exact copy of the
original file includes the unaltered metadata which allows examiners to properly
consider the integrity and veracity of the electronic files through use of such means as
reports generated by the software program that may help to identify deleted or altered
entries. For example, the original data file may provide the date a transaction was
originally created, dates of subsequent changes, what changes were made, and the
username of the person who entered or changed that transaction. This type of
information is directly relevant to the evaluation of the taxpayer's internal controls."

So what direction the audit would be heading for if the taxpayer is able to provide cancelled checks and receipts to substantiate all the expenses, but he has no computer records at all?

So what direction the audit would be heading for if the taxpayer is able to provide cancelled checks and receipts to substantiate all the expenses, but he has no computer records at all?

Not sure what you mean by "direction". As noted above, unless over $10M assets, taxpayer is not required to keep electronic records. However if taxpayer does keep electronic records, they can be demanded by IRS.

So what direction the audit would be heading for if the taxpayer is able to provide cancelled checks and receipts to substantiate all the expenses, but he has no computer records at all?

Not sure what you mean by "direction". As noted above, unless over $10M assets, taxpayer is not required to keep electronic records. However if taxpayer does keep electronic records, they can be demanded by IRS.

How does a taxpayer prove that he has no electronic records?

How does a taxpayer prove that he has no electronic records?

I suppose one provides the paper post-binder general ledger and related paper journals and Wilson Jones columnar pages and that should be evidence enough there are no electronic records. Electronic records are not required. Records of some sort are required, in whatever format the taxpayer utilizes. Under audit the TP is required to provide them.

Thank you.

I was just wondering how in the world a taxpayer can prove something which is non-existent, in case he has to.

I have had several IRS audits over the years. I agree with CaptCook. I have refused to give agents general ledger back up which they can take off site. In addition a back up could give an ability to look at other years that are not in the current examination. The agents have free access to look at anything in my office.