Do South Florida business owners have to turn over their business accounting software files in an IRS audit? As many taxpayers know in the IRS examination of tax returns over the past few years, the IRS has increasingly requested the electronic files of accounting programs, such as QuickBooks or Peachtree.
However, whether or not an IRS auditor's request for electronic files was proper has been increasingly questioned by taxpayers and tax practitioners. In response, the IRS announced that it was officially expanding its audit capabilities by training its agents to be proficient in auditing information from files of the accounting software often used by small businesses in October of 2010. The IRS also encouraged revenue agents to start requesting electronic files from taxpayers and practitioners during audits.
The IRS cites the following authority in support of a revenue agent's request for original backup files: IRC Section 6001, Treasury Regulation Section 1.6001-1(a), Revenue Ruling 71-20, and Revenue Procedure 98-25. The IRS argues that all of the aforementioned give the IRS broad authority to examine electronic records in order to establish the taxpayer's correct tax liability. In particular, Treasury Regulation Section 1.6001-1(e) requires the taxpayer to make these records available "for inspection." Additionally, Revenue Procedure 98-25 clarified that the IRS has a right to electronic records.
The IRS's authority was further upheld by the U.S. District Court in United States v. Rouse, No. 8:11-MC-00046-T-24AEP (M.D. Fla. 6/27/11). In Rouse, the IRS requested the taxpayer's QuickBooks backup files. The taxpayer refused and the IRS sued to enforce the summons. The judge in the case ordered the taxpayer to comply, citing IRC Sections 6001 (records) and 7602(a) (IRS summons authority). The court held that a "plain reading of section 7602" reveals that the IRS may 'examine books, papers, records, or other data.'" 26 U.S.C. Section 7602(a)(1) (1998) (emphasis added). Furthermore, the Court held that 'other data' under section 7602 includes the electronic backup files at issue, and thus, found the summons was appropriate.