The Internal Revenue Service has been ramping up enforcement of tax compliance and it’s a big concern for small businesses.

IRS agents are starting to request client backup files from small business accounting software such as QuickBooks and Peachtree. It’s clear in IRS regulations and precedent that electronic records can be requested and used in audits. Sec. 6001, Regs. Sec. 1.6001-1(a), Rev. Rul. 71-20 and Rev. Proc. 98-25 give the IRS broad authority to examine electronic records to establish the taxpayer’s correct tax liability.

The taxpayer must provide the electronic records upon request. If a taxpayer attempts to withhold them, the IRS may disallow all of the items that are unsubstantiated or it may summon the records.

As a small business owner it is your responsibility to have an audit proof process of collecting and archiving all accounting data. Your company’s accounting software files must be up-to-date and accurate.

In speaking with Judith Juback, President of Keynote Connections, she offered several tips on how to ensure an accurate backup archive:

• Make sure your bookkeeper is knowledgeable of bookkeeping procedures.
• Make sure they have a detailed understanding of QuickBooks and how the program functions.
• Ask your CPA for the Year End Adjusting Journal Entries so your QuickBooks files match the information on your corporate tax returns.
• Use QuickBooks to properly manage your business – that includes properly identifying revenues and the company operating expenses.

The money you save by avoiding costly run-ins with the IRS can be substantial when you consider the time and headache of not having the backup data readily available. Getting qualified assistance is also an important factor to consider when looking at the big picture.