In a letter this week, the American Institute of Certified Public Accountants (AICPA) urged the Internal Revenue Service (IRS) to work with small business owners to safeguard private data included in electronic accounting software records that the IRS may request as part of an examination. The electronic records might contain private information about clients unrelated to the tax return under examination, the AICPA said.
"Once the software file of a small business taxpayer is requested by the IRS for examination purposes, the AICPA believes the taxpayer should have the right to `redact' the software file and turn over only the data that is responsive and relevant to the examination - but no more," the AICPA wrote in the letter to Chris Wagner, commissioner of the Small Business/Self-Employed Division.
The AICPA has received inquiries from CPAs about how to handle an IRS request for accounting software files, especially when the files include data that is not pertinent to an examination or information from years other than the one being reviewed by the IRS.
The AICPA said it understands that receiving data in electronic format helps speed up the examination process, but that "reasonable safeguards should be available to protect small business taxpayers from turning over more data in an electronic format than is necessary for the IRS to perform an examination."
AICPA letter to the IRS:
When the IRS's small business accounting software examination program was initially rolled-out, a number of persons compared the small business software program to the procedures the Large Business & International Division has in place with respect to requests for the general ledger and subsidiary files of a large taxpayer in electronic format. We do not view SB/SE's accounting software examination program as being comparable to LB&I's program. Specifically, the large taxpayer undergoing an IRS examination is routinely represented by tax professionals; and the data being turned over in electronic format does not contain extraneous information unrelated to the LB&I examination involved. By contrast, because the small business taxpayer often maintains his own accounting software file and is not a trained bookkeeper or accountant, the data in the software file is not necessarily directly relevant to the IRS examination.
It is our understanding that the Service is taking the position that an IRS Revenue Agent has the right to request a taxpayer's software file because the file is within the definition of "records" for purposes of Internal Revenue Code section 6001. However, as we state above, the software file contains more than just the books and records applicable to the IRS examination. The software file routinely contains both tax related and non-tax related information, as well as information that may not be relevant to the tax years at issue or to the issues under audit. For example, the accounting software file might contain a taxpayer's client or customer list. In the case of an attorney or someone in the medical profession, it may contain information clearly considered confidential under the law.
Once the software file of a small business taxpayer is requested by the IRS for examination purposes, the AICPA believes the taxpayer should have the right to "redact" the software file and turn over only the data that is responsive and relevant to the examination - but no more.
The AICPA would like to begin a dialogue with the IRS on ways small business taxpayers might provide the Service with the necessary data in electronic format (from the software file) while providing them appropriate safeguards. For purposes of continuing our discussions about the Service's accounting software examination program, please feel free to call me at (401) 831-0200, or [email protected]; Danny Snow, chair of the IRS Practice and Procedures Committee at (901) 685-5575, or [email protected]; or Benson S. Goldstein, AICPA Senior Technical Manager, at (202) 434-9279, or [email protected].
Patricia A. Thompson, CPA
Chair, Tax Executive Committee