In reading a recent 143 page 2012 US Tax Court Opinion F.Lee Bailey vs IRS I ask why a famous attorney would not have his accounting records in the Cloud. In the Bailey case Judge Gustafson says “there is no provision that excuses taxpayers from retaining their records…taxpayers are required to retain their books and records as long as they become material….” Similarly Judge Gustafson presiding over a 2013 US Tax Court Opinion Graffia v IRS notes “For many of the disputed points in these cases, Graffia lacks records entirely”. While records created by Bailey and Graffia were lost, destroyed, or misplaced, there was no question that Bailey and Graffia owned those records.. But when your accounting records are in the Cloud, all 20th century rules of ownership become airborne. You might think you own your records after you scan raw data into the Cloud to your bookkeeper for processing. But it is not so apparent as to who owns the processed financial data or "accounting records" that are created from all those scanned documents.
In order to see how critical it is that you have control and ownership of your own accounting records in the Cloud think about these possible very realistic scenarios occurring to you and your business: Have you all thought of what might happen if the IRS subpoenaed your ex-bookkeeper who did not leave your company on the best of terms, to testify before a Grand Jury? Or perhaps your ex-wife has sued you for increased alimony and she subpoenas your bookkeeper to a family court hearing? Or even more realistically disgruntled ex-employees have a court issue discovery requests for documents sent directly to the outside bookkeeper and to the company that maintains the bookkeeper’s server, and this bookkeeper no longer works for you? How would you handle that? What if your outside bookkeeping company goes out of business or changes ownership? You call to get your records only to find out that the provider who had your records on their server no longer does business with your former outside accountant who has left the state, or worse the country. How do you get control over your business records?
Let's think "out of the box" by comparing processed accounting records on the Cloud to your Domain name on the Internet.: Who owns your domain name? You own your domain name if you are the “Registrant” AND you are the “Administrator” on ‘WHOIS”. What or Who is WHOIS? “WHOIS” is the entire Internet domain data base. Before we get to WHOIS we need to rewind back to President Eisenhower who created the Advanced Research Projects Agency (ARPA) in 1958. ARPA eventually evolved into two agencies, the Advanced Research Projects Agency Network (ARPANET) and the Defense Advanced Research Projects Agency (DARPA), both US Government Dept. of Defense agencies. DARPA and ARPANET created a protocol called WHOIS to keep track of ownership of domain names. Eventually the Government granted a few private businesses including Network Solutions in 1993 the authority to assign Internet domains and the rest is history.
Fast-forward to 2014 and WHOIS. Google WHOIS until you get in the WHOIS data base. Type in your domain name and see who owns your domain name. Don’t be surprised or concerned if you see your IT person as the Technical or Billing contact. But you the business owner should be “Registrant” and the “Administrator”. If you are not, you are not legally the owner. There is one exception and that is private registration. Yes, you may have a “private” registration which allows you to keep your identity secret from the public. But the sad fact is that under a “private” registration you have almost no way to prove to a Court that you are the legal owner if your IT people decide to quit the company and take the domain name with them and worse case shut your web site down.
Perhaps you see where I am going now. As goes domain ownership, so goes bookkeeping records ownership. When you scan your accounting records to the Cloud the work product like the check register produced from all those original documents will be owned by the “Administrator” who is on your cloud provider’s data base. Your Cloud Provider is giving your company server space somewhere in the world. Most likely the Cloud Provider was retained by your outsourced Bookkeeper and more than likely I would guess your Bookkeeper is the “Administrator”. You may also or may not be the “password Administrator”. However, the password “Administrator” for the password may or may not be the legal “Administrator” with the Cloud Provider. As with the Domain IT person, the renegade Bookkeeper could shut your accounting Department down in seconds and you may have little recourse if you are not the Administrator.
Are you confused? Sorry there is no easy answer here but there are some steps you can take right now to better protect and keep safe your cloud accounting records. Consult your attorney and make sure your legal department confirms that you are the administrator of the account with your outside bookkeeper or accounting service. Further work with your legal department to make certain the outside Bookkeeping Service has a lower security password than you so if in an emergency you could prevent the Bookkeeper from having access to the system. Make sure the Cloud provider the bookkeeper contracted with has a separate space on their server in your name and reserved for you. If you are not using the outside bookkeeper’s server, but using a QuickBooks Cloud type provider you may not have a separate legal ownership on the space they provide for you on their server. If all else fails, I recommend you call your legal counsel or legal department to create a bullet proof contract between you and your outsider bookkeeping service to better protect you. Finally, make sure to ask your attorney, “Who Owns Your Accounting Records”, and get the answer in writing. Good luck and thanks for joining me here on TAXVIEW with Chris Moss CPA.
Kindest regards and see you next time,
Chris Moss CPA