QuickBooks & Gov’t Audits – Now Both Federal & State (Sleeter Solutions ’13)

    • sleeter solutions 13 pic

 

The following was transcribed from the 1:45 pm session given  by Bruce T. Andersen, CPA on QuickBooks (QB) and Government Audits – Now Both Federal and State.

Bruce T. Andersen can be found on Twitter at @BTACT_LA , on LinkedIn here and on Facebook here.

There was some stuff that went by pretty fast, and i will be editing this post to include anything that was missed in the next couple of days. You can see spots where i had missed some stuff and noted it in the transcript.

When i got in, Bruce was discussing how Government audits are becoming increasingly more complicated, especially in a paperless world, and many times the very paper we wanted to get rid of  is the same documents wanted by government agencies when initiating an audit.

Breakdown of State Cases

  • Connecticut
  • Montana
  • New Jersey
  • New Mexico
  • Oregon
  • Washington

Breakdown state tax by type

  • Corp income – 4
  • Inheritance, estate and gift – 1
  • motor fuels – 2
  • personal income – 7
  • practice and procedure – 4
  • public utilities/transportation – 1
  • sales and use tax (over 80%) – 31

Evolution of the IRS QB audit 2010 – 12

Do you use QB?

Document request

list of items to audit

/////////////missed some stuff in here – get from Bruce

Now 2012 – 13

  • No reference or questions if you use QB
  • Year of audit id’d
  • No reference to items to audit
  • Comes on IDR #1
  • QB File – QBW
  • Admin login and pw
  • More than 1 company, “I WANT ALL QUICKBOOKS FILES”

Evaluate the Case

  • Evaluate the Auditor and the IRS Audit Group – Need to figure out who you’re dealing with.
  • Evaluate your skills to present and defend.
  • Evaluate the QuickBooks file you have to work with. If you have a ‘trashy’ file, you want to work harder to not turn over the file.
  • Evaluate the nature of the client being audited. Big emphasis on cash for instance
  • size and complexity of the business
  • industry the business operates in

-missed some stuff in here too – get from Bruce about evaluating client.

  • Give the IRS only schedules

Beautiful excel schedules import to IRS work papers

Start from trial balance in QB

provide metadata in schedules, even basic schedules contain metadata (last person to modify, date modified, etc. – data                                 embedded in doc’s)

Remember QuickBooks is only part of the audit

  • Give the IRS the QB file
  • Keep original in case a 2nd year is needed
  • Trip to 14 months
  • Sensitive to remove audit trail
  • DIY or outside data guru
  • Review before turning over to IRS

Case Management

  • Establish communication with the IRS
  • Establish the timetable for the audit
  • Communication with the tax client
  • Obtain chain of command within the case (contact info for auditor, manager of the auditor)

Implications of not using QB Desktop (what if you don’t have it? – what do you use?)

  • QB online
  • Sage 50
  • Sage 49 (Peachtree)
  • Xero
  • anything else from zero to infinity.

Story about audit in past where schedules were used in cases where QuickBooks was not used, or for whatever reason you didn’t want to give them QB files. Instead give awesome schedules. The IRS loves metadata too btw.

States and QuickBooks 

  • No noted trends have developed
  • Most states have not embraced QuickBooks
  • States beginning to encourage business clients to “turn over” their files to the state. To process payroll tax, etc.
  • Remember the position of the state – behind the IRS, no need to re-audit.
  • For businesses using something like ADP, it’s okay to turn over the files

Informing the Auditor

  • Part of the initial interview
  • request an understanding of the new paperless office
  • get the client on board

Best Arrangement

  • Obtain the sample of documents from the auditor ahead of time
  • Go into system and locate documents
  • Copy to a separate file with appropriate references to general ledger acct.
  • Be sure to reveiw so it makes sense.

Alternative Arrangement

  • Auditor makes source document selection on site during audit
  • may have auditor view detail and document their file
  • May have to print or eprint source documents
  • Unsupervised access is not a good approach

 What is Circular 230 and the IRS QB Audit?

  • IRS FAQ “…representative refuses to provide a copy of the taxpayers…file” – Circular 230 violation
  • One on one dialog iwth Ms. Hawkins – she was unaware of the IRS FAQ
  • And audit is an audit – if it’s not trustful, etc. then you have a problem with Circular 230.

government and state audits

Select Case Studies

Several case studies ranging in scope and practicality were presented for review. Not all are included here.

US vs. Zerjav – Summons for QB

  • 2011-2 USTC
  • Jan 6, 11 IRS issued summons for QB
  • Taxpayer resisted
  • Judge upheld IRS ruling

US vs. Sedaghaty (Aug 23, 2013)

9th circuit, 11-30342

Form 990……

US vs. Sideman & Bancroft LLP (JAN 13)

  • Criminal investigation of an individual tip
  • Records included qb printouts
  • Lawyer still had wrote checks, used paper slips for time tracking, etc.

Dodds vs. Commissioner March 13

  • TC Memo 2013-76
  • Horse breeding activity – hobby losses
  • Substantial underpayment penalties
  • accounting practices with masters in tax accounting made over 250k per year

Sampson vs. Commissioner 9/2013

  • TC Memo
  • MD in Cal w 2 S corps
  • CPA for many years – added statement to 1040
  • QB noted as souce docs
  • Noted later in case that QB may have been inadequate, but not excuse for CPA to not include income w filing for original T/R

 IRS FAQ’s

The IRS posted FAQ’s on their websites to help explain their position….(missed some stuff here) except the fact that the IRS does indeed have some marketing speak FAQ’s for visitors that are difficult to find, even if you Google the IRS FAQ’s on the topic. The link was about 300 characters long and was impossible for anyone to remember, thus making it difficult for even seasoned tax pro’s to find, much less someone unfamiliar with even what to search for exactly, but would still benefit from the information aggregated on this IRS FAQ page.

I will find this page and post it here in the next day or two.