Small businesses, of course, often find it easier to maintain all electronic records --- financial statements, client lists, sales data and the like --- within a single application. "The new software is very comprehensive," says Giovanni Coratolo, vice president of small business policy with the U.S. Chamber of Commerce. And as a result, small businesses often have proprietary, non-tax data contained within the files it would provide during an audit. So they risk providing the IRS with information that's outside the audit scope.
The concerns date back to about mid-2009, when the IRS began training its agents on the use of QuickBooks accounting software, says Benson Goldstein, the AICPA's senior technical manager, taxation. Once they gained proficiency, agents could conduct exams directly within the application. And some began asking for the electronic files, he notes. And at least a few tax professionals instead turned over printouts of the information. Based on Goldstein's conversations with different accountants, some IRS agents accepted the paper documents. Others didn't.
The AICPA grew concerned that some business owners could be compelled to submit more information than necessary, Goldstein says. "There's certain data," he adds, "that should be private."
What's more, by turning over information covering multiple years, businesses risk having to defend actions going back five or ten years, says Coratolo. "That's problematic when you have limited time and resources."
"I would definitely be opposed to this," says Paul Kierce, president and chief financial officer with Wilmington, Mass.-based ATC Technologies, a developer of medical devices. "If you want us to file electronically, that's fine. Then provide a format to enter the information and send it electronically." Providing extra information "lends itself to questions about who, what, when, where and why," he says. And, for one thing, answering them consumes time few small business people can afford.
To be sure, no one is suggesting that businesses withhold or doctor their files in an effort to cheat Uncle Sam. "We don't want to defend people who are breaking the law," Coratolo says. "But, we don't want to subject small businesses to having to go back years and years, and open up their information as a fishing expedition."
Then, there's the question of just how vulnerable the information is to being mishandled. "The more information you turn over, the more potential that mistakes could be made," points out Bill Rys, tax counsel with the National Federation of Independent Businesses.
In March 2011 , noting that "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." As a result, 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."
The IRS, perhaps not surprisingly, took a slightly different view. "Similar to paper records, it is important an exact copy of the original electronic data file be provided to the examiner and not an altered version," , Only an exact copy of the original file allows examiners to "properly consider the integrity and veracity of the electronic files."
Experts say it doesn't appear that the IRS is going outside its boundaries. "The IRS does have very broad powers in this area," says David Hammond, tax partner with BDO. Agents are authorized to examine any books, records or data that may be relevant to an audit, he adds, with a few exceptions. For instance, when examining a healthcare practice, the IRS cannot check patients' treatments.
Moreover, the concerns may not be all that relevant in practice, Hammond adds. "Usually people turn over everything. They want the audit to go well." Still, Hammond says he understands why people want to limit audit scope.
At this point, the situation appears to be in flux. According to conversations Goldstein has had, some revenue agents have received copies of both the AICPA letter and the IRS response, and shown them to taxpayers, as well. Goldstein surmises that the IRS is relying on the letters to provide uniform guidance to the agents. The IRS' letter explains its need for the software files, and offers assurance that the Service won't mishandle any information it receives.
The IRS has shown some willingness to compromise. In his response, Wagner said that taxpayers may condense electronic data files for dates prior to the years under audit. However, if the scope of the audit expands, the IRS may request a copy of the archive file created during the condensing process. The IRS and AICPA are scheduled to discuss the issue again during the next couple of months, Goldstein says.
It's possible technology could offer a remedy. Software developers should be able to refine their applications so that business owners can more easily segregate tax from other business information, and one year of records from another.
Larry Nannis, CPA and principal with the Needham, Mass.-based accounting firm Levine, Katz, Nannis + Solomon, PC, says he has heard of some tax professionals exporting information from Quickbooks to Excel before submitting it to the IRS. The formatting of the files would let the IRS agents know that the data originated in Quickbooks, so it's not as though anyone is trying to cover his or her intentions, Nannis adds. From what he has heard, the IRS hasn't contested the submissions -- at least not yet.
While the issue is sorted out, CFOs will want to take steps to close out their files at the end of each fiscal year, if they haven't, rather than keeping multiple years within one file. And, they'll want to consider segregating tax and other information. "Start to implement safeguards to at least mitigate turning over extraneous data to the IRS," Goldstein says.