The IRS Have Now Expanded the Scope of Their Audits to Include Electronic Data

An IRS audit has always been something which people have lived in fear of, although in most cases the audit itself was based on nothing more than the fact that you'd filed incorrectly for at least one year. In fact most audits aren't nearly as painful or as much trouble as people imagine.

As of 2010 though the IRS have now expanded their auditing capabilities to being legally able to examine the backup files created by the most common accountancy packages, including such as Quicken and Peachtree range of products. To facilitate these audits the IRS has provided special training for over 1,100 of their agents in examining data files from these software packages. This means that if you've altered data in any way to present only the financial facts you "want" the IRS agent to find, these same agents are proficient enough with your particular software package to the point that they're comfortable examining data from backups created months ago. In short trying to hide data in your backup files is now nothing short of audit suicide.

In addition to this the IRS are now encouraging businesses to submit electronic data for their returns, allegedly in an effort to reduce the amount of paper being generated and/or wasted in the tax returns process each year. Providing the IRS with this kind of electronic data would also mean that you have no way of managing your tax risk or liability since you're literally giving them your entire financial and tax history. This would make people wonder if the IRS are moving towards some centralized form of tax data submission directly from the taxpayers computer perhaps?

That being said the IRS have been given powers to examine electronic records to ensure that you're declaring your tax liability correctly. In fact the exact wording of this regulation means that your electronic records should be ready for inspection at all times, and this same data can be kept for as long as the IRS deem fit. You'll also need to be able to provide original copies of your financial files on DVD, CD or flash drive - emailed files are not acceptable. You'll also need to encrypt the files on the CD, DVD or flash drive before you mail them to the IRS - sending the encryption key separately. This alone has the potential to cause the chaos of stacks of CDs and DVDs piling up on IRS agent's desks but with no encryption keys to unlock the data, providing ammunition for a public relations disaster if not managed properly.

Several individuals and businesses have refused to supply this data so far, but the courts have ruled against them in every case. Also providing redacted copies of your electronic records isn't acceptable - the IRS are entitled to see the original data files in relation to your finances.

It appears that the IRS are finally expanding their capabilities and agent training to match the digital age we live in, so if you receive an IRS Form 4564 be prepared to hand over copies of your electronic accountancy data readers.