The IRS wants your data file - That's so 1980's....

Here's another unexpected benefit of cloud computing - preventing the IRS from snooping through your financial data.

The IRS has just issued guidelines for it's examiners to request copies of your accounting software data files.  They are thinking about QuickBooks, Peachtree, and other accounting software data files  - and they've installed software in their offices to access your financial information.

While having a 1980's era file-based system for sharing data files has long been a work-around for businesses to send their financial information to a trusted business partner like a CPA firm, the IRS has now clearly taken notice and wants in. 

The FAQ about this program on the IRS website is quite instructive - they want your data file, and the expect you to send it to them.  

"The IRS has instituted a program to request accounting software files when examining certain small business taxpayers, and SB/SE examiners can now accept and read data files from accounting software packages used by most small businesses"

The problem is that if you send the IRS your entire data file, this allows them to snoop far beyond the issue they are investigating - because these products store all of your data in a single file - your financial data, your customer data, your supplier data, your product data - and a single file includes data that spans many years - making it very easy and attractive for the IRS to go on a fishing expedition. The net: the very same single data file that made it easy to send your information to your CPA now exposes you to needless risk with the IRS.

We at Intacct were pleased to be invited to a meeting with the AICPA and the IRS in Washington DC last week to discuss this issue and how to protect taxpayers. And here's the cool thing about cloud computing - at least for modern multi-tenant cloud applications like Intacct - there simply is no file for IRS to request - we don't even have the concept of a file underlying the system. 

Instead the whole system is based on real-time collaboration over the web, with access control and security built in. With Intacct you've got two good options if the IRS wants your data - you can easily export a subset of your information that precisely matches their request and submit it to the IRS in whatever format you wish.  Or you can give the IRS examiner a login to your Intacct system, since you have complete control over what they can and cannot see and you can limit them precisely to the information they have requested.  In both cases, you can cost-effectively remain compliant while ensuring that you don't accidentally over-disclose information.

It's so interesting to see an unexpected downside of a 1980's vintage technology - the data file - cropping up in 2011. We've grown beyond our Betamaxes and our Bon Jovi cassettes - maybe with cloud computing we can also move on from data files.