Is Quickbooks Safe for Payroll?

For years, Intuit’s very popular Quickbooks program has been an option for small company payroll as well.

The company has a tremendous reputation for accounting and bookkeeping software. Indeed, there are very few options available that even come close to the ease of use of Quickbooks. Who knew that in 1983, when Quicken was released, that it would become the powerhouse of small business bookkeeping. In 1999, they began implementation of a payroll option. As the Internet became more popular, and more powerful, the online version of Quickbooks Payroll became a staple for small business payroll.

“Easy to use”, “Updates are automatic”, “Syncs w/our TurboTax” and several other positive comments came out right away. It seemed to be a safe, flexible and cost efficient method to handle the intricacies of payroll and payroll tax processing.

But is it really?

Tax Audits Become More Frequent

As our state and federal governments expand, there is constant pressure to insure that small businesses are paying their “fair share” of taxes. In 2009, an initiative was started by the Obama administration to “reduce payroll tax fraud in small businesses.” Many states followed suit.

IRS and State Unemployment Tax audits are now more frequent. Many small business owners have found themselves under attack, since they are a potential source of income that is not vigorously defended by powerful lobbies, such as big business, pharma and unions.

Defense and Representation

Intuit is a publicly traded company and has hundreds of thousands of clients. More than 50% of small businesses use Quickbooks in one form or another. Most small businesses are using one of the following seven online products: Quickbooks, Gusto, PatriotSoftware, Payroll4Free, ADP RUN, Paychex or Paycom.

One common feature of all of these companies is the lack of resources to properly represent a business owner in a payroll audit. While most claim to “go to the audit with you” they rarely do. For most of these companies, under a certain threshold of business, the client and the IRS receive a response letter to an audit notice. The letter essentially says “we did what we do with the numbers they gave us. We are not responsible for errors in inputted data.”

So the defense and representation can be an issue

Access to Company Records

When the IRS audits a company for payroll taxes, they are granted access to all files which are related to payroll. In the case of Quickbooks for example, they have access to your company’s entire Quickbooks file (the file with the .QBW extension, or in some cases the back up file, .QBB).

Business owners have to ask themselves, “Do we want the IRS to access our entire business file?” Do you? We advise you to seek the advice of a Certified Professional Accountant (CPA) and Tax Lawyer to structure your business in preparation of an audit.

So Why Should We Fear an Audit?

Audits are time consuming and very costly. The IRS is about two to three years behind in audits, so you won’t get audited for your most recent return, but from several years ago. This (conveniently) builds up late fees, interest and penalties. While IRS auditors are not directly compensated based on the amount of money they recover, they do get “review points” for larger recoveries. These points are evaluated in their periodic job performance reviews.

It is important to remember that while an IRS auditor will remain professional and seem impartial, they are not necessarily “on your side.” There is a small but significant incentive to find something owed.

What Has Happened So Far

In a future article we will relate some personal experiences of our clients and prospective clients who have been through IRS audits, but for now let us relate this one, with changed names:

“Mary and Bob owned a home based ‘non-traditional’ business that was picked for payroll audit by the IRS. They suspect it was because they paid out a lot of contractors, who were reported on form 1099. When the IRS requested their entire Quickbooks file at the audit, they had no choice but to provide it. They consulted with their CPA, Annie, who split the file in to two, providing just the last three years.

Still, the auditor went through the entire three years and found some ‘questionable’ lunches deducted as business expenses, and decided to open up their corporate tax returns as well.

Annie did the best to defend them but they still came out with a bill over $8,000 in back taxes, penalties, late charges and interest.

Also, the auditor has requested the previous 3 years of the Quickbooks file, since by regulation they are allowed to review the last 6 years.”

What You Can Do About It

If you are using a combination payroll/bookkeeping system, we recommend you either switch to separate systems, or work with your CPA to divide up the books to limit accessibility to your legal limits. We also recommend you use a separate bank account for your payroll.

There are many professional payroll providers that can assist you with the separate systems.

If you would like more information from us, please use the contact form below.
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Legal Disclaimer: EmployerNomics is not engaged in the practice of law. The content in this article should not be construed as legal advice, and does not create an attorney-client relationship. If you have legal questions concerning your situation or the information you have obtained, you should consult with a licensed attorney. EmployerNomics cannot be held legally accountable for actions related to its receipt or use.