By Fraud Expert, Ed Martin
Examining Book & Witnesses by IRS
With the increase in the use of automated accounting systems and tax preparation software such as Quicken, QuickBooks, MS Money, and other prominent software, including TurboTax, Tax Cut, Tax Works, etc., IRS is stepping up its scrutiny of the contents of electronic data.
In a Private Ruling: Chief Council Advice Memorandum UIL No. 7602.00-00 dated October 14, 2011, IRS issued an advice memorandum regarding six issues:
Issues:
1. May an examiner summon the taxpayer’s original electronic data files (or the backup files):
a. To obtain the associated metadata if the taxpayer offers to provide paper printouts of these data files (or spreadsheets created from the data files) that do not contain the metadata?
Metadata is defined herein as, information that describes how, when, and by whom a particular item or set of electronic information was collected, created, accessed, modified, and formatted. The Service’s examinations would be advanced by accessing metadata that 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. The value inherent in an examiner’s ability to obtain the date and source of recorded entries is self evident; the information tends to support or undermine the credibility of the entries in the business records. (QuickBooks refers to this metadata in an Audit Report file.)
b. To obtain the associated metadata if the taxpayer offers to provide a truncated or an altered copy of the original files in which the original metadata was removed or changed when the altered copy was created?
c. to obtain the recorded entries and associated, unaltered metadata for transactions that occurred before or after the periods being examined if the taxpayer offers to provide a copy of the data file showing only the recorded entries without the metadata for transactions that occurred during the periods being examined?
d. From the taxpayer’s accountant (third party) if the accountant recorded entries of the business transactions into the electronic file and possesses the records?
2. If a taxpayer provides the Service with an electronic data file on a CD or a thumb drive, must the examiner retain the original CD or thumb drive in the examination case file? Alternatively, may the examiner make an electronic copy of that file and include it in the examination file if the case is closed “unagreed” and the data file supports the examiner’s conclusions (or the data file contains information that may be relevant to a separate criminal investigation)?
3. Do the Federal Rules of Civil Procedure and the case law thereunder offer analogous support for summoning electronic records with intact metadata?
Conclusions:
The key to Item 1.a. and b., above is governed by the statutory authority of IRC Sec. 7602 (a)(2) including the determination if a return is correct. The Service may properly summon the taxpayer’s original electronic data files containing the unaltered metadata, because it “may be relevant” to the determination. If the taxpayer’s offer to provide copies that omit the metadata or actual production thereof does not restrict the Service’s authority to summon the original, unaltered metadata. This item is supported by US Supreme Court case, U.S. v. Powell, 379 U.S. 48, 57 (1694).
The key to Item 1.c., above is governed by IRC Sec. 7602 (a)(2) and the Service may summons information, including metadata, concerning transactions and events that occurred before and after the periods under examination so long as that information
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