Can the IRS require small businesses to turn over their electronic data??
A study done by the IRS 10 years ago showed that small businesses are among the largest contributors to the “tax gap,” or the amount of taxes owed but not paid because of noncompliance with tax laws. During the 2001 tax year, the last time the agency measured the shortfall, non-farm sole-proprietor income was estimated to account for about 20% of the $345 billion gap.
With this 10 year old study as ammunition, the Internal Revenue Service is moving aggressively to collect more taxes from small businesses. One of the strategies employed requires companies being audited to turn over exact copies of the electronic records kept in their business-software programs. Small business owners feel that providing the electronic records could result in a fishing expedition by IRS auditors.
Last March, the AICPA wrote a letter to the IRS and suggested that companies be allowed to redact software to release only relevant data. Agents have accepted such information in the past. Larger business with more sophisticated/expensive software are able to lock out portions of data that are not relevant to the audit scope.
Feel free to contact me at Wallace Neumann & Verville, LLP if you would like to discuss any electronic record requests from the IRS. We are monitoring the issue and the AICPA’s attempts to limit the IRS’s access to electronic data. If you are interested in reading more on this subject the Wall Street Journal has a great article.