Implications of IRS Examination of Accounting Software Data 

    PROCEDURE & ADMINISTRATION 
    by Donald Morris, CPA, Ph.D., and Lisa Chen, Ph.D. 
    Published May 01, 2014

    EXECUTIVE
    SUMMARY

    Illustration by Harry Campbell
    • Illustration by Harry CampbellAccounting software, such as Intuit's QuickBooks, is widely used by small businesses to memorialize transactions for tax reporting purposes and to monitor and control profitability. In examinations, the IRS routinely requests copies of the electronic files created by a taxpayer's accounting software.
    • The files created by accounting software contain metadata about who made entries to the files and when these entries were made. The IRS can use this information as evidence when making a case against a taxpayer.
    • The maintenance of detailed accounting records about an activity is greatly facilitated by accounting software, which can help a taxpayer prove that he or she had a profit motive for the activity.
    • A taxpayer can face severe sanctions for destroying computer files containing accounting records that the taxpayer knows are relevant to current or future litigation.

    Changes in the law often follow innovations in technology. Before the age of computers, accounting books and records meant paper documents. Now books and records include data files stored on a computer's hard drive or in the cloud. The Code's recordkeeping requirements are prescribed by Sec. 6001, which authorizes the IRS to issue rules and regulations to carry out the provision.

    In addition to its obvious importance to practitioners and their clients, accounting software has taken on an important role in taxpayers' dealings with the IRS in court. QuickBooks accounting software claims the lion's share of the small business recordkeeping market,1 and because QuickBooks is used so widely, all of the cases discussed in this article involve that software, but the issues apply to all accounting software packages.

    This article reviews recent court decisions illustrating the importance of how taxpayers use their accounting software. In addition, one case demonstrates that when taxpayers try to leave a trail for the IRS, they may leave more information than they meant to, and another demonstrates that when taxpayers are trying to delete a trail, their efforts may not be fully successful or may be viewed as a badge of fraud.

    In dealing with the IRS, it is important to understand the expanded scope of "books and records" in the context of taxpayers' use of accounting software. The IRS can request not only taxpayers' paper documents but also their data and backup files as well as information on who kept the records and when changes were made to those records.2 This means that accountants and their clients need to know not only how to use the accounting software, but also what they can and cannot do with the computer records when a client is audited.

    Blaming the Tools

    There is an adage that a good worker does not blame the tools. In Ganias,3 not only did the taxpayer attempt to blame QuickBooks for his inaccurate records, but the trail of false entries in QuickBooks was an important factor the IRS used to defeat the taxpayer's argument that his underreported income was due to his innocent reliance on the accounting software. In attempting to exonerate himself by providing the IRS with key journal entries, Stavros Ganias unwittingly provided important metadata that proved his undoing.

    Metadata "is information that describes how, when, and by whom a particular item or set of electronic information was collected, created, accessed, modified, and formatted."4 This information may be important to the IRS because it "identifies the original date a transaction was entered in the electronic records, the dates of any changes to the entries, and the username of the person who made the entries."5

    At his 2011 fraud trial, Ganias testified that he maintained his books and records for 2003-the year under examination-on QuickBooks and attempted to use this fact as part of his defense. Since 1985, Ganias had been the owner-operator of a bookkeeping, accounting, and tax preparation service. Before that, he had been an IRS revenue agent for 14 years. In 2003, Ganias used QuickBooks to maintain his own accounting records from which he prepared his 2003 federal income tax return, which significantly understated his income for that year. Upon an examination of his 2003 tax return, the IRS determined that he had violated Sec. 7201 (attempt to evade or defeat tax) by willfully evading his tax obligations for the year.

    At trial, Ganias explained that in preparing his records using QuickBooks, he inadvertently entered several payments from a major client into his "owner's contributions" account rather than into a revenue account, which caused his QuickBooks statement of revenues and expenses to understate his net income. These figures, in turn, had been used to prepare his tax return for 2003.

    According to the court, "for the government to convict a defendant of willfully attempting to evade or defeat any tax," it must prove "(1) willfulness, (2) the existence of a tax deficiency and (3) an affirmative act constituting an evasion or attempted evasion of the tax."6

    Ganias's defense was that his admitted error in making the bookkeeping entry-that resulted in his underreported income-was not willful but was the result of using QuickBooks. This "good faith" defense sought to deflect the IRS's charge of fraud by undercutting the requirement for willfulness. To establish fraud the IRS must establish "that the law imposed a duty on the defendant, that the defendant knew of his duty, and that he voluntarily and intentionally violated that duty."7 To overcome the taxpayer's claim that he had a "good faith" belief that he was in compliance with the tax laws, the IRS must prove, beyond a reasonable doubt, that the taxpayer did not hold such a belief.

    In his defense, Ganias claimed that when he realized that he had made the coding error (entered the wrong account name/number in QuickBooks), he subsequently made a correcting journal entry to reclassify the payments to revenue; this entry, however, was made two days after a search warrant was executed at his office and a mirror image was made of his computer hard drives. Once the IRS obtains accounting software records, agents are instructed by the Internal Revenue Manual (IRM §25.5.4.3) to make a copy of the computer files, in the event the taxpayer or its representative asks that the records be returned.8 Sec. 7612(c)(2) provides for certain protections for the software copied, such as numbering copies and storing the software in a safe place.

    The court noted "that, despite the corrections, when [Ganias] used QuickBooks to determine his income and prepare his 2003 tax return, the payments still did not show up on his profit and loss statement." Ganias further claimed that "even in making the corrections, he did not input the payments properly," and, as a result, "he innocently relied upon the incorrect profit and loss statement to prepare and pay his taxes."

    The court was not persuaded by Ganias's testimony, pointing out that he was "hardly a neophyte with regard to the use of QuickBooks, bookkeeping principles generally, or the tax laws of the United States." The court noted that he was a "decorated and oft-promoted" IRS agent who had been responsible for auditing a number of large corporations during his time at the IRS.

    For these reasons, he would have known that QuickBooks uses an account coding system with asset, liability, equity, income, and expense items grouped into easily recognizable blocks of numbers. For example-using a default chart of accounts-all equity accounts are grouped in a block with accounts numbered from 30000 to 39999, and all income accounts are grouped in a block with accounts numbered from 40000 to 49999. In addition, QuickBooks users must specify the type of account each time an account is created. It was therefore impossible for the court to recognize Ganias's bookkeeping errors as "good faith."

    The final blow to Ganias's defense came, however, when the IRS introduced evidence "demonstrating that Ganias had previously improperly recorded payments in QuickBooks in such a way that the payments did not show up as income" and that "2003 was not a mistake, but rather, part of a larger pattern of willful evasion,"9 extending back at least to 1999, 2000, and 2001. In light of the file retention capabilities of QuickBooks (e.g, its Audit Trail Report and Voided/Deleted Transactions Summary Report), file recovery software, and users of QuickBooks moving to the online version that stores all their records on third-party servers, taxpayers should now assume that any attempts to revise the history of their accounting records retroactively, without leaving a trail, is likely futile.10

    In addition, taxpayers should not underestimate the IRS's technical prowess with QuickBooks and other accounting software. A recent document request, enforced by court order, for example, included,

    A copy of the original electronic backup file of the QuickBooks books and records that includes the period from 01/01/2008 thru 12/31/2008. This copy should not be an altered version of the QuickBooks data but rather a copy of the original electronic backup file . . . The QuickBooks backup file should include any changes to the data entered after year end and should have a file extension of QBB [QuickBooks for Windows backup file]."11

    The order also requested "The QuickBooks administrator's user name and password. . . . [and] the Version (i.e., year) and the Edition (e.g., Pro, Premier, Enterprise Solutions) of QuickBooks used to create the backup file."12

    Training Clients on Accounting Software but Turning a Blind Eye to the Results

    That business records are maintained on accounting software may be used to imply the accuracy, order, and organization of a taxpayer's accounting records. Accounting software, however, is sometimes used to mask improper deductions, such as personal expenses erroneously classified in business expense accounts. It is bad enough for a client to do this, but it is much worse when the accountant coaches the client or turns a blind eye to the client's improper use of the software.

    In Poole,13 defendant Joseph Poole, a former Maryland CPA, initially encouraged his client, Stilianos Mavroulis, to purchase QuickBooks to maintain his company's accounting records. The client's business, Fidelity Home Mortgage Corp. (FHMC), a mortgage brokerage firm, had expanded its operations to 45 states. Poole subsequently taught his client how to use QuickBooks and also accepted his client's QuickBooks records as accurate, using them to prepare the client's tax returns (Form 1120S, U.S. Income Tax Return for an S Corporation, and Form 1040, U.S. Individual Income Tax Return). Upon audit, the IRS found Poole guilty of aiding and assisting in the filing of false tax returns in violation of Sec. 7206.14

    The court noted that not only had Poole taught his client how to use QuickBooks, but that he "frequently answered questions about the characterization of expenses," and then prepared financial statements and tax returns from the client's records while exercising "deliberate avoidance of knowledge," e.g., looking the other way at the client's characterization of personal expenses as deductible business expenses. These expenses included school tuition for his children and personal trips for his family and totaled approximately $1.1 million for tax years 1998, 2000, 2001, and 2003.

    The court summarized its findings and the reasons for its ruling as follows.

    At the time Defendant Poole prepared the 2000-03 Form 1120-S returns for FHMC and the 2000-03 Form 1040 tax returns for Stilianos and Elizabeth Mavroulis, Defendant Poole had access to FHMC's QuickBooks and knew that Stilianos Mavroulis was using FHMC funds to pay for these personal expenses and benefits. As Defendant Poole was well aware, many of these personal expenses and benefits were not booked in QuickBooks as shareholder draws . . . [but] instead, the expenses were buried in other categories that made detection difficult.15

    In preparing the client's Forms 1040, Poole also ignored the fact that distributions from the client's S corporation exceeded the shareholder's basis and should have been treated as capital gains, rather than nontaxable distributions from the accumulated adjustments account (AAA). These amounts included $67,815 for 2000, $105,161 for 2001, and $155,781 for 2003.

    In the end, the court found that the evidence in the case "cumulatively demonstrate[s] beyond a preponderance of the evidence" that there was "a tacit, mutual understanding" between Poole and his client to "knowingly and willfully prepare Form 1040 returns that substantially underreported" the client's taxable income.16

    QuickBooks and the Hobby Loss Rules

    Whether an activity will be viewed by the IRS as a business or a hobby under Sec. 183 rests on the preponderance of the evidence based on the nine tests enumerated by the IRS in Regs. Sec. 1.183-2(b). One of these tests-the manner in which the taxpayer carried on the activity-has particular relevance when QuickBooks is involved. One element of the "manner in which the taxpayer carried on the activity" is whether and how the business records were maintained and used. Evaluation of the records focuses on two distinct purposes: (1) providing figures to be used in preparing tax returns ("memorializing") and (2) facilitating "a periodic determination of profitability and an expense analysis that may be used to implement cost-saving measures timely and efficiently."17 However, the court in Burger18 noted that, while "a taxpayer need not maintain a sophisticated cost accounting system," he must institute the use of "cost accounting techniques that, at a minimum, provide the entrepreneur with the information he . . . requires to make informed business decisions."19 The latter includes "monthly expense reports and income projections."20 Two recent cases, both dealing with the common hobby loss from horse-related activities, illustrate the court's methods for assessing the taxpayer's QuickBooks records and how the use to which those records are put can produce opposite results.

    Foster21resulted in a negative outcome on hobby losses for the taxpayer who maintained the records for his horse racing and breeding business on QuickBooks, but did so, according to the court, only "in order to memorialize transactions for tax reporting purposes, rather than to analyze expenses to determine profitability." What the court was looking for at the least was a breakdown by the different horse-related activities, for example training, quarter horse racing, thoroughbred racing, breeding, and "pinhooking,"22 "to assess which were more profitable."23

    A similar result was reached in Dodds.24 There the court noted that although the taxpayer "used QuickBooks for his financial records, which allowed him to separate his personal finances from his [horse] breeding activity, he... never made financial projections for his breeding activity, nor did he maintain a budget for his breeding activity."25 According to the court, the "[p]etitioner used profit and loss statements prepared with QuickBooks, but there is scant evidence the petitioner used them for the important purposes of cutting expenses, increasing profits, and evaluating the overall performance of the operation."26

    In Foster, more detailed recordkeeping could have been developed using QuickBooks by setting up different sets of accounts for each of the activities (segments, profit centers), from which the profit or loss from that particular activity could be determined. What the taxpayers did in Foster, however, was simply to lump all the activities together, showing overall losses of roughly $90,000 a year for eight years (totaling $723,744 between 2002 and 2009). The court in Dodds noted that, "[p]erhaps the most important indication of whether an activity is being performed in a businesslike manner is whether the taxpayer implements methods of controlling losses, including efforts to reduce expenses and generate income."27 Without a breakdown of the relative profitability of each of the horse-related activities, this was not possible and ultimately contributed to the court's ruling against the taxpayer that the activity was not engaged in with the intent of making a profit.

    Practice tip: For many small businesses, QuickBooks plays an important role in helping manage purchases, inventory, sales, payroll, and other transactions. It also facilitates businesses' tracking the performance of different activities. Selecting QuickBooks "Classes" in Company Preferences allows a business owner to track income and expenses by departments, segments, locations, separate properties, or any other meaningful breakdowns of a business.

    In another horse-activity hobby loss case, Dennis,28 a husband and wife used QuickBooks to keep the books and records for three distinct activities: (1) horse breeding, (2) hay baling, and (3) cosmetology. In its opinion, the court noted that "maintaining complete and accurate books and records may indicate that a taxpayer has engaged in an activity for profit."29

    According to the court, in Dennis, the taxpayers "separated their business and personal accounts and, in addition, had different accounts for each of the businesses."30 Specifically, the court noted, that the taxpayers' rudimentary record system allowed them to assess their horse breeding activity's economic performance and identify any cost-reducing strategy. Mrs. Dennis testified that the QuickBooks program allowed them to categorize their horse breeding activity expenses and generate profit and loss statements. . . . Their record system further allowed them to identify the escalating veterinary expenses and prescribed a cost-reducing strategy. . . . [In addition] Mr. Dennis could pinpoint immediately that the weekly cost of trimming of the horses' hooves and the necessary inoculations added up to a substantial sum. . . . [As a result] Mr. Dennis reduced the $9,682 of veterinary and horse care expenses in 2001 by 67 percent (to $3,180) for the tax year 2002 and 53 percent (to $4,541) for the tax year 2003.31

    As a result of its analysis of the taxpayers' recordkeeping procedures and how the records were used, the court concluded "that petitioners used their books and records not only for tax preparation, but also for identifying and implementing cost-saving strategies and attempting to foster profitability."32 This fact, together with examining several of the other nine tests, persuaded the court that the horse-breeding activity was not a hobby but a business, permitting the taxpayers to deduct losses from it.

    Responsible Person for Trust Fund Taxes

    The Arndt33 case shows that a taxpayer's use of QuickBooks may be one factor in determining the taxpayer's status as a "responsible person" who may be liable for the 100% penalty for failure to pay trust fund taxes under Sec. 6672. A responsible person is one who has "the power to control the decision-making process by which the employer corporation allocates funds to other creditors in preference to its withholding tax obligations."34

    Melanie Arndt was the office manager for Pro Touch Professional Finishes Inc., a painting contractor. According to the court, "evidence strongly suggests that Arndt was a responsible person. She had full check-signing authority, paid many of Pro Touch's bills, and filled out and signed the company's employment tax returns. These duties are usually performed by someone with the authority to decide which creditors will be paid."35 Each pay period, Arndt "entered the hours worked into QuickBooks . . . [and] used the program to generate payroll checks that either she or [owner Jason] Acevedo signed." Arndt also used QuickBooks to generate reports showing the company's outstanding bills, which she gave to Acevedo "who told her which bills to pay." Finally, Arndt "used QuickBooks to generate the checks for those bills and either she or Acevedo signed them."36 The case, which was before the court on summary judgment motions from both parties that were denied, was sent back to the jury to determine whether Arndt was a responsible person. The court's analysis of the use of QuickBooks, however, is instructive when considering who may be classified as a "responsible person."

    IRS Records Requests

    At the outset of an IRS examination, the agent will provide a request for documents including bank statements, ledgers, records, or other data. In Euge,37 the Supreme Court interpreted the phrase "other data" very broadly. Other courts have interpreted "records, or other data" to include tax software.38 This interpretation was based on the court's understanding of "relevant records or other data" to include any record that will "illuminate any aspect of the return." From these cases it can be seen that the IRS has wide authority when it comes to requesting electronic versions of QuickBooks files and the accompanying metadata.

    If the taxpayer or his or her representative fails to supply the information in a timely manner, the IRS may issue a summons. Sec. 7602(a) authorizes the IRS to examine (and summon if necessary) "any books, papers, records, or other data" that may be relevant to determining the proper amount of tax due. Sec. 7602(a) limits the request only to what may be relevant; but the term relevant has been broadly interpreted by the courts. In Arthur Young,39 for example, the Supreme Court indicated that the phrase "may be relevant" in Sec. 7602(a) is more inclusive than in the Federal Rules of Evidence Rule 401 dealing with the admissibility of evidence to a court proceeding.

    Where the requested documents were prepared on accounting software and the IRS's request for the ledger (for example) is complied with by giving the agent a paper printout of the records, the agent may accept the paper document but may also request the electronic version of the files. In response, some taxpayers may attempt to delete or destroy certain electronic files rather than release them to the IRS. In a 2007 U.S. Bankruptcy Court case involving a taxpayer's attempt to avoid paying a $3 million income tax bill, the intentional destruction of QuickBooks records was at the center of a determination of the taxpayer's qualification for Chapter 7 bankruptcy relief. In Krause,40 the government sought to have the debtor's tax debt "excepted from discharge under 11 U.S.C. Section 523(a)(1)(C), to set aside alleged fraudulent conveyances by the debtor, and to have numerous trusts and entities declared to be nominees of the debtor, subject to the Government's tax lien."41 Gary Krause's petition for bankruptcy depicted him as a "debtor with minimal assets and no income" while he actually held significant assets and was in control of "a vast network of trusts, business concerns, and possible offshore entities that, although they [were] not owned by Krause, appear[ed] to be controlled by him."42

    Krause, an attorney, was requested to produce certain documents and evidence, including QuickBooks files from his computer. The bankruptcy trustee believed these files would shed light on the nature of a number of entities she believed Krause controlled, but which he had not reported to the court as assets in his petition for bankruptcy. Since it was believed Krause maintained extensive records of his transactions with these other entities on his computer, the QuickBooks files were assumed to be critical evidence in the case.

    When the hard drives on Krause's two computers (a laptop and a desktop) were examined by the trustee's staff, however, it was determined that the QuickBooks files had been wiped, erased, or otherwise eradicated from the hard drives before they were turned over to the trustee. It was further determined that Krause had installed a program called "GhostSurf Platinum 2006 on his laptop on . . . the day preceding turnover, and on his desktop . . . shortly after the Court had ordered him to produce the electronic records."43 The trustee asserted that Krause installed GhostSurf on his computers and "used it to permanently wipe or purge sensitive files and e-mails from both hard drives."44

    According to the experts testifying in the case, GhostSurf can be set "to purge or wipe 'deleted files' in such a way that the data is actually overwritten, precluding the ability to recover or restore the files and data."45 The significance of this process, also according to the experts' testimony, is that normally "when a user 'deletes' files from a hard drive, the data remains intact. The act of deletion merely eliminates the 'pointer' that allows the computer to locate the data on the hard drive. By using data recovery software, that data may be extracted"46 and recovered. To prevent this recovery of deleted data, GhostSurf overwrites the deleted files "with a new file that contains no bytes of data and is named in a manner inconsistent with Windows operating system naming conventions."47 According to one of the experts, "Once the files are overwritten in this fashion, an undelete utility cannot recover them."48 The court referred to this process as "spoliation." According to the court, "spoliation is defined as 'the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation.'"49

    In Krause, the court determined that the taxpayer/debtor had willfully destroyed electronic evidence of his financial holdings by using GhostSurf to alter the QuickBooks files on his computers shortly before turning the computers over to the IRS. As a result of analyzing all the evidence and the taxpayer/debtor's obstruction in trying not to turn over his financial records, the court determined that the various trusts and other entities that Krause claimed not to own were indeed his property and as such must be turned over to the trustee in the Chapter 7 bankruptcy proceeding.

    Also, according to the court, "A willful and intentional destruction of evidence may give rise to an adverse inference that the unavailable evidence would have been unfavorable to Krause in connection with the Trustee's and Government's claims."50 Though Krause testified that he purchased GhostSurf as protection against computer viruses, according to the court, he "clearly knew GhostSurf was wiping deleted files and erasing traces of his internet activity."51 The court also stated that Krause had a duty to preserve all the data on his computers. "[A] duty to preserve evidence arises when the party has notice that the evidence is relevant to litigation or should know that the evidence may be relevant to future litigation."52 According to the Bankruptcy Court, Krause's duty to preserve electronic evidence was triggered when discovery began and the government served its request for production of documents and its adversary complaint. As the court noted, "Once the duty to preserve attached, Krause was required to suspend his routine document destruction practices."53

    As a result, the court concluded that, "Based upon the evidence presented here, it is clear that Krause (a licensed Kansas lawyer) violated his duty to preserve electronic evidence."54 It further concluded that the "deliberate and intentional use of a wiping software such as GhostSurf and the timing of its use further leads the Court to the inescapable conclusion here that Krause willfully and intentionally destroyed electronically stored evidence."55

    After considering the evidence, the court noted that "Krause's actions warrant the severest of sanctions" and that "Krause's running of the GhostSurf wiping program after being ordered to produce electronic evidence and before turnover of his computers is simply inexcusable."56 As a result, Krause's $3 million tax debt was not dischargeable in bankruptcy.

    Conclusion

    As QuickBooks and other accounting software have become ubiquitous in the small business arena, new issues can be expected to arise regarding their use. As one further example, a recent case involved a taxpayer claiming that his QuickBooks records could not be used against him at his fraud trial because they were hearsay evidence.57 The cases summarized here show that how accounting software is used is an important consideration for the IRS and the courts. As noted, they show that accounting software may be used as a tool for monitoring and controlling a business's profitability or simply memorializing its past performance. Accounting software's use can also be a determining factor for a court in evaluating whether a taxpayer is a responsible person in a payroll trust fund 100% penalty case. Finally, the cases show that the IRS's authority to examine a taxpayer's books and records extend to electronic files created by accounting software as well as metadata showing when and by whom the records were created or changed.

    When a client is subject to an IRS request for documents (or a summons), practitioners may find themselves in a compromising position with respect to releasing client accounting software files. While they do not want to turn over more data than actually requested to avoid liability issues with their clients, they also do not want to put themselves in the position of obstructing an examination or investigation.

    In responding to an IRS document request (or summons) for files maintained on QuickBooks or other software, it may be tempting for some taxpayers-either on their own or using commercial software such as QB Audit Disclosure-to partition or restrict the files to "provide selective data for the time period required and no more."58 But the commercial availability of such programs should not be interpreted to mean that their results will protect the taxpayer's actions from being interpreted in a negative light by the IRS or the courts. Thus, despite the capability of limiting disclosure with such programs, or eliminating access to files with programs like GhostSurf, the cases described here show that caution must be exercised when attempting to limit access to data to which the IRS believes it is entitled, including metadata.

    Acknowledgment: The authors would like to thank Ms. Hong Geng, their graduate assistant in the master’s in accountancy program at the University of Illinois–Springfield, for locating and summarizing 70 cases dealing with the use of QuickBooks in tax disputes.

    Footnotes

    1 In April 2012, QuickBooks's market share was reportedly 90% (Murphy, "How Intuit Rules Your Books," CNNMoney).

    2 Sec. 7602(a)(1) authorizes the IRS to examine "books, papers, records, or other data which may be relevant or material."

    3 Ganias, No. 3:08CR224(EBB) (D. Conn. 8/12/11).

    4 Chief Counsel Advice 201146017.

    5 Id.

    6 Ganias, slip op. at 3, citing Sansone, 380 U.S. 343, 351 (1965).

    7 Ganias, slip op. at 4, quoting Cheek, 498 U.S. 192, 201 (1991).

    8 "An owner of records who produces summoned records to the Service without being ordered to do so by a court may at any time request their return. Such a request constitutes a withdrawal or revocation of consent to the use of records. The request may be formal or informal, written or oral, regardless of phrasing. Note: If a court order is issued for the enforcement of the summons, the owner of the records cannot withdraw consent to the use of the records" (IRM §25.5.4.3). The IRM further directs the agent to "[p]romptly photocopy records after their receipt and return them to the owner of record in the following circumstances: (A) If there is reason to believe that consent will be withdrawn; or (B) When an owner of records provides the sole set (whether originals or copies) of records" (id.). Furthermore, Chief Counsel Advice 201146017 makes it clear that copying computer files is the legal equivalent of photocopying paper files.

    9 Ganias, slip op. at 7.

    10 Like most software programs, QuickBooks has undergone a series of revisions and upgrades. In Ganias, although the specific version of QuickBooks is not mentioned, the tax year at issue is 2003. For QuickBooks versions prior to 2006, the Audit Trail feature could be turned on or off by the user; after 2006 the Audit Trail is automatically turned on. This feature retains a record for each transaction, and the Audit Trail report lists each accounting transaction and any additions, deletions, or modifications that affect that transaction. QuickBooks also preserves the previous records each time a user edits, voids, or deletes a transaction. Deleted transactions, for example, can be accessed through: Reports > Accountant & Taxes > Voided/Deleted Transactions Summary.

    11 Wier, No. 11-51281 (E.D. Mich. 2/21/12) (stipulated order and judgment), slip op. at 2. A regular QuickBooks backup file (.QBB) contains a full version of the business financial data, any estimates, templates, letters, and images used in the projects. The .QBB file is used mainly to save data and restore the original data in case the company's primary working files (.QBW) were corrupted or deleted. The .QBB file is also used to transfer data to another computer or user.

    12 Id.

    13 Poole, No. RDB-08-0098 (D. Md. 7/24/09), aff'd, 640 F.3d 114 (4th Cir. 2011).

    14 Sec. 7206: "Any person who- . . . (2) Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized . . . shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution."

    15 Poole, slip op. at 9.

    16 Id., slip op. at 14.

    17 Dennis, T.C. Memo. 2010-216 at *19.

    18 Burger, T. C. Memo. 1985-523, aff'd, 809 F.2d 355 (7th Cir. 1987).

    19 Burger, 809 F.2d at 359.

    20 Dennis, T.C. Memo. 2010-216 at *19.

    21 Foster,T.C. Memo. 2012-207.

    22 Defined by the court as, "buying a young horse and training it to the point it can begin racing, then selling the horse to someone else who will actually race it" (Foster, T.C. Memo. 2012-207 at *6).

    23 Id.at *15.

    24 Dodds, T.C. Memo. 2013-76.

    25 Id.at *6.

    26 Id. at *14-*15.

    27 Id. at *15.

    28 Dennis,T.C. Memo. 2010-216.

    29 Id. at *18.

    30 Id. at *20.

    31 Id. at *20-*21.

    32 Id. at *21-*22.

    33 Arndt, No. 11-CV-00546 (D. Wis. 7/22/13).

    34 Bowlen, 956 F.2d 723, 728 (7th Cir. 1992).

    35 Arndt, No. 11-CV-00546, slip op. at 4.

    36 Id., slip op. at 3.

    37 Euge, 444 U.S. 707 (1980).

    38 Norwest, 116 F.3d 1227 (8th Cir. 1997).

    39 Arthur Young, 465 U.S. 805 (1984).

    40 Krause, 367 B.R. 740 (Bankr. D. Kan. 2007), aff'd, 637 F.3d 1160 (10th Cir. 2011).

    41 Krause, 367 B.R. at 745.

    42 Id. at 746.

    43 Id. at 748.

    44 Id.

    45 Id. at 750.

    46 Id.

    47 Id.

    48 Id. at 752.

    49 Id. at 764, quoting Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212, 216 (S.D.N.Y. 2003).

    50 Id. at 770.

    51 Id. at 757.

    52 Id. at 764, citing Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212 (S.D.N.Y. 2003).

    53 Id. at 766.

    54 Id.

    55 Id. at 767.

    56 Id. at 770-771.

    57 In Qunbar, 335 Fed. Appx. 133 (2d Cir. 2009), the taxpayer unsuccessfully appealed his fraud conviction under Sec. 7201 and Sec. 7203 based on the insufficiency of the evidence.

    58 QB Audit Disclosure marketing claim from its website.

    Contributors

    Donald Morris is a professor of accountancy, and Lisa Chen is an assistant professor of accountancy, both at the University of Illinois-Springfield. For more information, contact Prof. Morris at dmorr2@uis.edu.



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