What’s New with IRS AuditsGreta Hicks
March 3, 2014 — 3,673 views
The CAS responsibility was to support the Revenue Agents by organizing the voluminous amounts of data into a manageable format. Specialists often use sampling, stratification and regression analysis application of data.
Recent requests are very different. CAS personnel did not ask for “backup tapes.” They asked that every transaction in the General Ledger System be downloaded electronically in Excel or flat ASCII format. Do you or someone in your company have the skills to convert your current computerized records from your software program into Excel or flat ASCII format? Or, will you have the expense of hiring outside vendors so you can respond to this type of Information Document Request (IDR)?
Examples of wording in most recent CAS IDRs include:
- Provide a machine sensible file on CDROM or DVD.
- Provide General Ledger detail in flat ASCII file with either fixed length fields or if a character delimiter is used, please use the ~ as the field delimiter.
- Provide in spreadsheet or flat file or other similar type file.
Where does this authority come from and is your company ready for this type of audit?
CODE SECTION 6001 AND REGULATIONS
Code Section 6001 and accompanying regulations are rather simple, but very broad. For example: Section 6001 provides that “every person liable for any tax imposed by the Code, or for the collection thereof, must keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever necessary, the Secretary may require any person, by notice served upon that person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not that person is liable for tax.”
Section 1.6001-1 (a) of the Income Tax Regulations generally provides that persons subject to income tax, or required to file a return of information with respect to income, must keep such books or records, including inventories, that are sufficient to establish the amount of gross income, deductions, credits or other matters required to be shown by that person in any return of such tax or information.
Section 1.6001-1 (e) provides that the books or records required by §6001 must be kept available at all times for inspection by authorized Internal Revenue officers or employees, and must be retained so long as the contents thereof may become material in the administration of any internal revenue law.
THE DEVIL IS IN THE DETAIL – IRS ADMINISTRATIVE RULINGS
If your company has over $10 million in assets, Rev. Rul. 70-15 and Rev. Proc. 98-25 apply. Excerpts follow.
Rev. Rul. 71-20, “establishes that all machine-sensible data media used for recording, consolidating and summarizing accounting transactions and records within a taxpayer’s ADP system are records within the meaning of §6001 and §1.6001-1, and are required to be retained so long as the contents may become material in the administration of any internal revenue law.”
Rev. Proc. 98-25 goes further to state, in part: “The taxpayer must provide the Service at the time of an examination with the resources (e.g., appropriate hardware and software, terminal access, computer time, personnel, etc.) that the Revenue Agent determines is necessary to process the taxpayer’s machine-sensible books and records.”
In addition, it requests that “machine-sensible records be maintained by the taxpayer to meet the requirements of §274 (d) relating to the amount, time, place and business purpose of a business expense…” Except as otherwise required, “a taxpayer is not required to create any machine-sensible record other than that created either in the ordinary course of its business or to establish return entries.”
RECORD RETENTION AGREEMENT
In addition to the CAS person assisting the Revenue Agent with the audit, CAS performs analysis of the company’s Record Retention Agreement, which is a requirement for all companies with over $10 million in assets. Before a Record Retention Agreement is reached, the CAS person performs an audit of the company’s computer system to determine systems in use, whether the system clearly reflects income, and the taxpayer’s current record retention procedures.
If the current system does not meet the requirements of Rev. Rul. 71-20 and Rev. Proc. 98-25, the company must come into compliance by setting up the required record retention system and enter into a Record Retention Agreement with the IRS. Periodically, the CAS will follow up with the taxpayer to insure that the taxpayer is in compliance with their Record Retention Agreement.
Note: The records evaluation by a CAS person is not an “examination,” “investigation,” or “inspection” of the books and records within the meaning of §7605 (b) of the Code, or a prior audit for purposes of §530 of the Revenue Act of 1978.
Is your company in compliance with Rev. Rul. 71-20 and Rev. Proc. 98-25?