IRS Wants Access to Small-Business Accounting System

Small businesses are one of the main sources of the "tax gap"--the gap between what analysts estimate should be paid in taxes, and what actually gets paid.  There's less oversight, and also less expertise about tax--while some of the noncompliance is certainly deliberate, some of it is also probably sloppiness, or overoptimism about what deductions are legitimate.

The IRS is attempting to crack down by demanding full access to their entire accounting database.  Small businesses are, predictably, pushing back:

The problem with new IRS software requests, according to AICPA, is that small-business record-keeping software is flexible enough to bring in unrelated financial data that are fully integrated with the tax-preparation information.

Mr. Snow, the CPA, said the small-business rules aren't analogous to what the agency does with large businesses, which typically can furnish rigidly segregated electronic data. "For example, an agent will ask for a month of accounts payable or certain payroll records," he said. Large businesses often have tax professionals on staff to handle such requests and restrict access to unrelated information.

Small-business advocates said that if a company turns over its complete electronic records, there is no way of knowing what the IRS might do with it. Typically the agent takes the file offsite to examine it using IRS software, Mr. Snow says. "This is creating angst in the minds of small-business owners," said Giovanni Coratolo, a small-business expert with the U.S. Chamber of Commerce. "When you give that much data, it opens the doors to mischief."

Others are concerned about agents' access to unrelated data such as customer lists, fearing what would happen if word got out that a business was talking to the IRS. "Believe me, small businesses don't want the IRS calling their customers" and asking questions, said Benson Goldstein, senior technical manager of taxation at AICPA.

On the one hand, I certainly appreciate privacy concerns.  On the other hand, one suspects that at least some of this objection is the knowledge that the IRS is going to find overenthusiastic expensing, and unreported income.