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During IRS audits, we routinely encounter examining agents who become suspicious (even apoplectic) when the audit trail from the client’s general ledger to source documents is imperfect. Well, it turns out the IRS may be throwing stones in their own glass house. The IRS reports to Congress and other external parties the size of its unpaid tax debts to justify its requests for enhanced resources for tax enforcement, and for other informational purposes. The gross receivable is taken from the agency’s general ledger.
According to a General Accounting Office (GAO) report issued November 28, 2022, the general ledger amount is actually only an estimate, and there is no audit trail to corroborate the general ledger number. The GAO report summarizes: “[The] IRS cannot trace the reported gross receivable balance from its general ledger to detailed supporting records maintained in its subsidiary ledger. This lack of traceability leaves [the] IRS unable to identify which taxpayers owe the tax debts summarized in the gross federal taxes receivable balance or how much each taxpayer owes.” The GAO report further describes the IRS’ books as containing “significant deficiencies” that are non-compliant with FFMIA federal financial management systems requirements.
So next time an IRS agent gets cross about a client’s imperfect record-keeping, should you trot out the GAO report and point out the hypocrisy? There may different views on this, however the fact that the IRS may be no better (maybe much worse) at record-keeping than your client probably won’t get you very far in excusing deficiencies in the client’s documentation. The IRS typically expects taxpayers to do as they say, regardless of what they themselves do.
Peter A. Lowy, a shareholder in Chamberlain Hrdlicka’s Houston office, is best known for his tax controversy work and deep experience in the energy sector. He also advises corporations and other taxpayers in a broad spectrum of ...