In a brilliant attempt to “reduce burden” for taxpayers, the IRS now has a new tactic for auditing small businesses. They now have Quickbooks and Peachtree software and are requesting electronic versions of accounting records for their audits. They have released further details to remind that it is mandatory that you provide your accounting records in an electronic format if they are requested. So what does this mean for you if use one of the off the self software packages for your accounting records?

From an IRS audit prospective, this means that the door will be open to analyze data much further to determine where they may be able to effectively find compliance problems (aka get more money from you). If they have the electronic accounting file, they can review the audit trail to see if anything was changed after the transaction was originally entered. They can tell how often you update your records. They can also see all deleted transactions. The problem is that they can start asking a lot of questions that are really out of the scope of what may have originally selected your returns for audit.

Here is the Q&A from the IRS on requests for electronic software records. http://www.irs.gov/businesses/small/article/0,,id=238525,00.html

Check out Question #6 from the IRS:

Q6. How will the electronic data be used?
A: Most accounting software programs can generate a large number of pre-set reports. Each report can be modified to fit the examiner’s needs. When working with these reports, the examiner can “drill down” to the underlying data and documents to further investigate items, as appropriate. The software also allows the examiner to test the integrity and veracity of the accounting records in making a determination as to the reliability of the records for examination purposes. However, the examiner may still need to request other documents when such records are necessary to properly test a return item or issue.

Wow I really think this will help speed the audit along and I especially like the “further investigate items, as appropriate.” That sounds so fun!

How about Question #12 from the IRS:

Q12. The accounting software backup file can contain transactional data for several years that are outside the scope of the audit. What, if anything, will the IRS do with that information?
A: If IRS is given a backup file that includes data for years not under examination, IRS will not utilize that data during the examination of the current year. If based on the results from the current year examination a decision is made to expand the scope of the! examination to prior or subsequent years, the taxpayer will be notified. The records may be utilized after that notification.

So they probably won’t expand the scope of most audits, right (Sarcasm)?

For most clients that we see, their Quickbooks file does not contain all of the transactions necessary to complete their tax return until we clean the file and enter adjusting entries. Many Quickbooks files we see have significant problems like negative accounts receivables, large balances in their undeposited funds account, and negative accounts payable entries. If the IRS gets their claws into these types of files, I foresee that they will be digging much further and causing a lot more time and money to be spent because audits will last longer and require more documentation and research.

So what is a business owner to do to protect from this unnecessary evil? Here are a few items to consider:

1. Business owners should stop and think about their own skills. Are their books and records really something they would want to turn over to the IRS in their current condition?
2. Most business owners are trying to use Quickbooks to manage their check book or maybe their receivables. If so, let’s talk about other solutions that may even be more effective. There are receivables-only solutions that can help more effectively collect money and expedite the collections.
3. Is this really an effective use of the business owner’s time?

Our firm offers solutions to remove the burden of bookkeeping from the owner and allow them to concentrate on making money and growing their business. We use professional accounting software systems that are not compatible with the IRS electronic accounting systems. The records will be accurate from the start and good planning for taxes can occur all throughout the year. We generally can assist owners with this process and show them how they can save more money than it costs to have this service.

Let us show you how it can be a win-win situation for you and if you are the lucky recipient of an IRS audit notice, we can make the process much smoother and less costly than letting the IRS dig aimlessly!

If you operate business in Mecklenburg County, North Carolina, you are required to have a Privilege License (similar to a Business License). Anyone doing business in Charlotte/Mecklenburg, whether home-based or at another location; whether it is a sole proprietorship, partnership, LLC, or corporation; full-time or part-time; regardless of size, unless the business is exempted by the North Carolina Department of Revenue and/or Federal Law.

Privilege license fees range from $50 to $10,000 and the fees are based on revenue from the prior year and the classification of the business. The license runs from July 1 through June 30 each year. Renewals were sent to all license holders within the past two weeks. If you did not receive a renewal, you may wish to contact the City-County Tax Collectors office to find out why.

View or Print the License Application
View the Classification Codes for Privilege Licenses

For more information, please visit the Mecklenburg county website.

This is a very common question we receive, especially from business owners. They often want to know if their business should lease the car and what the tax effects will be.

First, get information on both scenarios to determine what the prices will be for both scenarios. Don’t forget to get the residual value on the lease. Then, you can determine the internal interest rate on the lease and determine which scenario is a better value for your dollar. You should also consider how many miles you will put on the vehicle. If you may go over the mileage allowance, you are probably better off purchasing the vehicle.

If you own a business and the business is the buyer or lessor of the vehicle, you will probably end up paying higher insurance rates for commercial vehicles and higher registration and property taxes. It usually works out better for the individual to purchase the vehicle and have the business reimburse the individual by the mile at the standard mileage rate. The only real exceptions to this is if you plan to purchase a Hummer or gas guzzling vehicle where actual expenses are preferable to the standard mileage rate. The rate for 2011 is 51 cents per mile.

If you still are not sure, we can perform a detailed analysis of lease vs. purchase based on the details of each deal that you provide to us. Let us know if we can help with this.

I hear this question very often when speaking with business owners. These receipts can be a hassle to keep up with and filing is never fun. If you had asked me a couple of years ago, I would have probably told you that credit card statements or bank statements showing the debit charges would have been enough to support your deduction for the IRS. This has changed a bit though as the IRS has become more detailed and seems to be questioning more when they do audit taxpayers now.

Our internal best practice has been filing this receipts in an accordion file by month. I don’t think It is necessary to spend too much time filing these receipts but just being able to locate them if asked by the IRS should be the goal. Another problem with our current technology has arisen though. Most receipts are now printed on thermal paper. If you have ever looked at one of these receipts a year or two later, they fade away and become a blank slip of paper. Therefore, I recommend that these receipts be periodically scanned to preserve the information. Otherwise, by the time the IRS gets around to asking for them, they may have turned into magical disappearing ink and the IRS may disallow the deduction.

I recommend all business owners invest in a sheet feed scanner and even consider going paperless to save time and have a reliable source of data for audit and record keeping. Fujitsu makes a great line of ScanSnap scanners and Neat Receipts has some great portable scanners also. Go ahead and bypass the flat bed scanners and move up to sheet feed scanners. You will thank me later!

We also have a new product for simplifying home and offices with paperless technology. Let us know if you would like more information on how we can protect your data in a paperless environment and help streamline your life!