IRS Publication 4837, otherwise known as “Achieving Quality Examinations through Effective Planning, Execution and Resolution” published by the IRS Large Business and International Division, indicates that it would be wise to have supporting documents readily available when audited. Because you want to defend your position and you really don’t want the cost of responding to the audit to be greater than the potential tax impact.
The IRS will make Information Document Requests (“IDRs”) to support claims made on any entities tax return involved in an audit. Various types of documentation support revenue recognition and expense claims. It is highly recommended that this documentation being organized, accessible and easily reproduced – sounds like a perfect scenario to justify an electronic document management system (“EDMS”).
Some types of documents that support revenue recognition are contracts, leases and licenses. To support transactional events like acquisitions or dispositions, closing binders will have the required documents. Expenses are of course supported by vendor invoices or contracts and payroll reports. Other documentation includes bank statements, journal entries with supporting documents and even market reports (mark to market).
If your business is ever involved in an audit and the IRS issues an IDR, it is good practice to assemble the requested documentation in electronic format and retain an exact copy of the information provided. That way as the IRS reviews and responds to the new information, you are looking at exactly the same information that they are.
Supporting documentation that is organized and electronic will speed up the audit process and reduce internal costs to respond. Supporting documentation in an EDMS that can export the files and retain the organizational structure will greatly reduce response costs. Supporting documentation actually linked to the specific tax forms and line items is a dream, possible, but a dream at this point.
Millennia Group, LLC, Information [Found] is Power – www.mgdocs.com, firstname.lastname@example.org, (630) 279-0577 x122