IRS Electronic Record Use

Some of the most common questions we’ve been hearing lately are about the use of electronic records in tax preparation and filing. In this day and age, more and more business records are now virtually transmitted and filed, which then begs the question – how does the IRS handle electronic records, what should business owners expect, and what should business owners know about IRS electronic records use?

In this Tally Services blog, we’ll cover some of the most common electronics records questions, as answered by the IRS. Continue reading to learn more about IRS electronic record use and how it affects your business:

Does the IRS request electronic files?
Yes! During an examination, the IRS will likely request your electronic files with the Form 4564, Information Document Request (IDR), at the beginning of the process. They will also ask for the administrator's username and password, if needed to access the data. When you submit your files, they should be provided on a CD, DVD, or a flash/jump drive. Email is not used in this case to ensure security of the data in the files.

When does the IRS request electronic files?
Typically, electronic files are requested during Small Business or Self-Employed examinations. These examinations are designed to helps taxpayers understand and meet tax responsibilities as a small business owner or self-employed individual. The use of electronic records will help the auditor apply the tax law with integrity and fairness by showing them the entirety of your books electronically.

Are there security concerns with sharing electronic files?
Any time you are sharing sensitive information with any third party, you should be aware that there is a bit of risk in terms of security. While the IRS makes every attempt to protect the data, it is still wise to create a separate user account for the auditor with a new password. This account must have administrative authority, but at least your account and password will still remain secure.  

What types of electronic records does the IRS accept?
Currently the IRS accepts all major types of files used by business taxpayers. If for some reason the IRS cannot read your file types, the auditor will work with you to design a course of action that will result in the audit being finished in a timely and efficient manner.

Must I agree to submit electronic records?
Ultimately, yes. The IRS has legal authority to request accounting records in electronic format is based on Internal Revenue Code section 7602(a), Internal Revenue Code section 6001, Regulation 1.6001-1(a) and -1(e) (PDF), Revenue Ruling 71-20 and Revenue Procedure 98-25. Refusal to do so will ultimately delay the inevitable audit process and can result in fines and/or legal trouble for business owners. 

How will the files be used?
Just like paper documentation, the electronic files will be used to study business data and ultimately check the integrity and veracity of your business’s accounting records in making a determination as to the reliability of the records for examination purposes. However, keep in mind that the auditor may also request further documentation at any point to complete the audit.

Can the files be condensed?
Often accounting software programs will condense the data to reduce old and closed transactions. However, when submitting electronic files to the IRS, the data must include all transactions during the years of the audit in question. The files cannot be condensed or cleaned up in any way.

What sensitive information is stored within my files?
Many businesses store sensitive and privileged information about their customers and vendors in their electronic records. It can be frightening to share this information with an outside source. Per the Internal Revenue Code section 6103, auditors are prohibited from unauthorized disclosure of information obtained during the course of a tax examination (including any sensitive business information). Auditors receive training on these practices, and the IRS has many procedures in place to prevent the information from being misused in any way.

If you have further questions about this topic, click here to read more about IRS electronic record use and how it may affect your business someday. If you have further questions or concerns about submitting your electronic records to the IRS, please do not hesitate to contact Tally Services. We can help walk you through the process and ensure you’re submitting the appropriate files in the correct manner.

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