AICPA urges IRS to help safeguard electronic accounting records

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; Danny Snow, chair of the IRS Practice and Procedures Committee at (901) 685-5575, or; or Benson S. Goldstein, AICPA Senior Technical Manager, at (202) 434-9279, or


Patricia A. Thompson, CPA
Chair, Tax Executive Committee

You may like these other stories...

More and more businesses are adopting the cloud in order to take advantage of benefits such as greater efficiency, increased productivity and lower costs. Companies in general are flocking to the cloud for email hosting,...
A great way to increase business for your accounting firm is to remain at the front of your clients' minds all throughout the year. One of the best ways to do that is through an email newsletter. Perhaps you send out a...
Cybersecurity is no longer the domain of an organization's IT staff. It's moved to the boardroom, and in a big way. Accountants and financial managers may have been thinking it's just the province of the tech...

Already a member? log in here.

Upcoming CPE Webinars

Oct 9In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards.
Oct 15This webinar presents the requirements of AU-C 600, Audits of Group Financial Statements (Including the Work of Component Auditors).
Oct 21Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience’s communication style.
Oct 23Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.