The IRS has released a memorandum to its examiners instructing them on what types of information they are now allowed to get from small business taxpayers’ accounting software data.

The memorandum provides guidance on when to request accounting software backup files from a small business taxpayer during an examination, and the restrictions placed on examiners when reviewing the software data and safeguarding the records.

In addition, the IRS has posted new information on a frequently asked questions page on its website about the use of electronic accounting software records. The IRS noted that at this time, it has the ability to accept and read data files from the accounting software programs used by most business taxpayers.

According to the IRS guidance, examiners are only supposed to review data relevant to the year or years under examination. However, they can make an exception when reviewing transactions for the month prior to and the month after the tax year or the tax periods before and after the ones under examination, if the transactions in those timeframes are relevant to the data they are seeking. Examiners can also review any of the transactional data that has been created or changed during the tax year under examination.

The IRS met with the AICPA and several accounting software vendors last Thursday. Matt Yuskewich, past chair of OSCPA’s Executive Board, also participated in the meeting. 

At the AICPA meeting AICPA encouraged software developers to provide options allowing users to provide only the data that is relevant to the IRS examination. With some accounting software packages, it is difficult to isolate the backup data for only the specific period under examination by the IRS. OSCPA has been critical of the IRS about a pattern of overreach, including this latest action that positions CPAs and their clients to release potentially sensitive information such as credit card data and health care information protected by HIPPA requirements, among other concerns.

According to Yuskewich, “This issue is still be debated as certain software contains data that is not subject to or pertinent to the examination process. Although the IRS suggests obtaining a complete backup of all electronic records will expedite the audit and allow them to evaluate a taxpayers internal controls the practitioner and taxpayer community is skeptical and does not want to provide any more information than is absolutely necessary to examination.”

OSCPA wants to know your thoughts on this issue. Email your comments to taxcomments@ohio-cpa.com. For more information contact Amy Mignogna, OSCPA’s director of tax policy.