By Bonnie Buol Ruszczyk
Guest post by Cathy Iconis, CEO, Iconis Group
Gone are the days of the green-lined, yellow-paged business ledger. Also nearing extinction are the carbon copy receipt books. Most small businesses these days rely on QuickBooks to execute and track their expenses and manage their books. Aside from the basic financials, however, QuickBooks is also used by many small businesses to store personnel data, confidential client information and other sensitive material. It just makes sense to streamline company information as much as possible instead of storing it in multiple places or using a variety of software programs. It is more efficient and many times more cost effective, something that is always top-of-mind for the small business owner.
This ability to store confidential client information is one reason why many small business owners are concerned about the IRS’ new initiative requesting that small business owners hand over their QuickBooks files when audited. In the Wall Street Journal article, Small Businesses Fight IRS Over Data, a walk-in clinic owner expressed his concerns over the new process, citing that some medical firms enter confidential client data directly into QuickBooks. “Would turning over the information endanger patient privacy?” he asked. It’s a valid question.
Along with the concern over client privacy, there is worry about what the IRS will do with the information. Unlike more complex software used by larger companies that can differentiate and hide information prior to audit submission, QuickBooks is unable to sufficiently filter this data to just the information the IRS needs. This leads some business owners to fret that the information could be used for a ‘fishing expedition’ outside of the year and audit in question. Benson Goldstein, Senior Technical Manager of Taxation at the AICPA, told the Wall Street Journal that many are concerned about the repercussions should it be revealed that businesses passed along such information to the IRS. “Believe me, small businesses don’t want the IRS calling their customers [and asking questions].”
Why is the IRS beginning to implement this new standard? According to the IRS, small businesses are among the largest contributors to the “tax gap,” or the amount of taxes owed but not paid because of tax law noncompliance. In 2001, the last time the agency measured the shortfall, nonfarm, sole-proprietor income was estimated to account for about 20 percent of the $345 billion gap.
So should the average small business owner be concerned? Absolutely! Let’s face it, small business owners usually don’t have a large accounting department and are often behind on entering data and might not know how to properly record transactions. If an IRS auditor looked at many business owners’ accounting data, they might think there are non-compliance issues, when in reality, it is just an error in how the information is entered. With the IRS going in this direction, it will make tax work that much more difficult and almost impossible for business owners to conduct business without a tax person on their side advising them.
I agree that we need to cut down on non-compliance; honest taxpayers suffer when others cheat the system. The problem lies in the methodology. Data from an accounting system shouldn’t be used as evidence. The IRS should be looking at bank statements, client interviews and publicly available information. Only time will tell if our concerns are justified, but in the meantime, it may pay to have an experienced accountant take a look at your accounting system and help you get it up to date, if necessary.
Cathy Iconis, CPA, knows the last thing most small business owners want to think about is their accounting, but it is often the number one cause for a business owner’s stress. Iconis Group understands the unique needs of creative firms and can handle all the accounting for them on an outsourced basis. But they go further than that to also provide business owners with the advice and information they need to make decisions and grow their businesses. Cathy is one of CPA Technology Advisor’s 40 under 40 and knows how to leverage cutting-edge technology to make life easier for busy creative firm owners.