IRS auditing through QuickBooks.

• Author: Wolbach, Kristine R.

The IRS has provided QuickBooks accounting software training to its Small Business/Self-Employed (SB/SE) division examiners. While the training was limited to that particular software, practitioners should expect that information requested for small business audits will change for all taxpayers using an accounting software package. It is always helpful for practitioners to understand how the other side thinks, so a review of the new IRS inquiries regarding software and transaction printouts will aid CPAs in representations before local SB/SE examiners.

Internal Control

The IRS small business examiner is required to review a business's system of internal control to enable the examiner to better plan the audit. The auditor is trained to review the accounting software's built-in controls and how taxpayer use of those controls could affect the IRS's reliance on the accounting records. The IRS will likely ask questions about who makes deposits, who performs the bank reconciliation, and who enters sales information into QuickBooks. A good source for likely IRS interview questions can be found on the IRS website in the Cash Audit Techniques Guide (www.irs.gov/businesses/small/article/0,,id=211049,00.html).

Practitioners should expect IRS questions about who can access the accounting software and whether login passwords are assigned to specific users. The purpose of the questions is to identify which persons have the ability to change accounting entries. The audit trail feature in later versions of QuickBooks is not optional, and the examiner may request reports detailing changes of accounting records. The audit trail will identify changes in the original record, the date the changes were made, and the login identity of the person who initiated the changes. QuickBooks will also generate a voided and deleted items report that the examiner may request.

Reconciling Taxpayer Books to the Return

The first step in each of the IRS audit programs is to reconcile the amount on the return with the taxpayer's records. The auditor will use this step to point out possible differences that may require additional analysis of taxpayer records. The IRS will ask about methods of accounting to determine if the books agree with the elected method on the return. Quick-Books company preferences can be set up for either accrual or cash books, and many QuickBooks reports can be formatted under either method.

Selecting Samples for Testing

The examiner is given classified...