Selected for an IRS Audit? What to do.
I was asked a question today that really made me think. What does one do when the IRS selects a company for an audit? This is not a new question for me. In fact, it is one of the most common questions that I am asked during an initial consultation with a potential client.
In my many years as a non-profit CFO, I have been through many, many different audits. I know how auditors think and what they are looking for. I know how to help businesses get organized and keep good records in the event they are ever audited and help move them from a place of fear into one of strength and empowerment.
This question; however, I had not been asked before. When the IRS notifies a company that they are being audited and you hand over your QuickBooks file, the IRS has access to more than one year of data. Suppose you started your business in 2002, it is now 2012 and you receive notice that your 2007 tax return is being audited. What do you do if they request access to your QuickBooks file? Once in that file, they have access to data from 2002 through 2012.
Is there a way in QuickBooks to restrict them to only be able to view the year that is under audit? This question was asked in a QuickBooks online forum, relayed to me and well, it made me think. There really is no way that I know of to restrict access to a particular year within the file. QuickBooks offers the ability to close out a year and then allows the user to password protect access to that data. That won’t work; however. Even if you have a different password for each year, you will have to go back through prior years to get to the year under question, thus having more than one year of data available.
The only real solution I could think of is closing out the file at the end of the year to a separate QuickBooks file and then running the cleanup function to remove all past year’s data. The data for prior years is still there – it is journalized with the detail removed. To do this, follow the steps below at the beginning of the New Year (note: these instructions are for QuickBooks 2011 and should work for other versions):
• Create a backup of the file (File, Create Backup).
• Create a folder on your hard drive to store each year’s new file – perhaps a folder named “Yearly QB Files.”
• Restore the backup (File, Open or Restore Company, Restore a Backup Copy).
• Save the new file to the folder you use to store the yearly QB files. Use a unique name to identify the file (i.e. ABC Company – 2010).
• Once restored, open up the cleanup tool (File, Utilities, Cleanup Company Data).
• Select “Remove transactions as of a specific date.”
• In the box, enter the date to remove the transactions up to. For example, it is 2/2/12. If you only wanted data from 1/1/11 forward (2011), enter 12/31/10. It will remove (journalize) all transactions on or before that date.
• There are other options that can be selected as part of the cleanup. Check those that apply to you.
• Once the cleanup process is finished, run a P&L detail for a prior year (in the above example, 1/1/10 – 12/31/10) to make sure all the detail has been removed.
• Make a backup of the file following the steps above.
• Switch back to your original file before entering in any new data in for the current year (File, Open Previous Company).
Do this at the beginning of each year and you will have one file with accounting detail for that year only and a separate file for each subsequent year in the event you are audited by the IRS, allowing them access only to detail for the year under question.
Have other questions about what to do in the event you are audited, talk to your CPA or tax professional. One article I recently read on the subject that has very good information: “What To Do If The IRS Audits Your Tax Return.”
Quickbooks Acting Strangely?
QuickBooks Tip of The Day: If your QuickBooks file contains 5 or more years of data and/or is beginning to act strangely, create a portable file (File, Save a Copy/Backup, Select Portable Company File and Next. Save to your desktop). Close QuickBooks, re-open and restore the portable file you just created. Want to know where QuickBooks is saving your files? When open, hit the F-2 key.
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