IRS Computer AuditsMs. Greta P. Hicks
August 22, 2013 — 2,530 views
What’s New with IRS Audits
IRS Small Business Self Employed (SBSE) field audits and the IRS Large Businesses and International (LB&I) Division have updated their training for employees, especially their most recent hires. Revenue Agents are asking that all records be submitted electronically, preferably using Excel.
Examples of wording in most recent IDRs from Revenue Agent:
Contributions, Provide in Excel Format: Date, payor, amount of the expense, and detailed description of the charity contributed to. (Actual wording.)
Repairs: Provide in Excel Format: Date, payor, amount of Expense, and detailed description of the nature of the work performed.
As to the request for “description,” how does the taxpayer provide this information on Excel without pulling each invoice and typing in the description? Isn’t this the Agent’s responsibility? Rev. Proc. 98-25 states: If “neither the EDI (computer) transactions, nor the accounts payable system, contain product descriptions or vendor names. To satisfy the requirements of § 6001, the taxpayer must supplement its EDI records with product code description lists and a vendor master file.” Most systems have a vendor master file list but does yours have a “product code description list?”
Within LB&I there are Computer Audit Specialists (CAS) who are Revenue Agents trained in various computer programs and their manipulation. Back in the old days, CAS requested “backup tapes” of records and they wrote queries to perform analysis of selected trial balance items. Or, the CAS reached an agreement to have access to the taxpayer’s computer system, to access pre-agreed upon files. The CAS responsibility was to support the Revenue Agents by organizing the voluminous amounts data into a manageable format. Specialists often use sampling, stratification, and regression analysis application of data.
Computer Audit Specialists (CAS)
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 in order to respond to this type of Information Document Request (IDR)?
Examples of wording in most recent CAS IDR’s:
1. Provide a machine sensible file on CDROM or DVD.
2. 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.
3. Provide in spread sheet 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, as 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 - In 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 must meet the requirements of this revenue procedure.”… “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 (RRA)
In addition to the CAS person assisting the Revenue Agent with the audit, CAS performs analysis of the company’s Record Retention Agreement (RRA) which is a requirement for all companies with over $10 million in assets. Before an RRA 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 RRA with the IRS. Periodically, the CAS will follow up with the taxpayer to insure that the taxpayer is in compliance with their RRA.
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?
Ms. Greta P. Hicks
Greta P Hicks CPA
Greta P Hicks is a former IRS Examination manager and Ms Hicks currently serves on the Editorial Board of the Texas Society of CPAs and is Tax Editor of Today’s CPA. Greta is active on the TSCPA IRS Relations Committee and teaches seminars on IRS.