Originally Published on forbes.com on November 24th, 2011
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The chief counsel in CCA 201146017 has given examiners the green light to issue a summons for metadata. I found this disturbing for two reasons. One was just the general principle of the IRS being able to issue a summons for something new. Last month the chief counsel told them they could not go issuing warrants to internet service providers. That was good. This month the chief counsel is giving the OK to issue summons for metadata. That’s not good – just on general principles. The other thing that was disturbing is that I did not have a clue as to what metadata is. Wikipedia was not much help:
The term metadata is an ambiguous term which is used for two fundamentally different concepts (types). Although the expression “data about data” is often used, it does not apply to both in the same way. Structural metadata, the design and specification of data structures, cannot be about data, because at design time the application contains no data. In this case the correct description would be “data about the containers of data”. Descriptive metadata, on the other hand, is about individual instances of application data, the data content.
I actually took a course in data base concepts and have a brother who worked in the field who used to try to explain it to me. There is something called thethird normal form. It is very important. I never figured it out. Fortunately the chief counsel’s office explained what they mean by metadata:
Generally, metadata is information that describes how, when, and by whom a particular item or set of electronic information was collected, created, accessed, modified, and formatted. The questions above arise in the context of examinations of taxpayers that keep their business records electronically with metadata automatically created as an integral part of the records. In many instances, the Service’s examinations would be advanced by accessing metadata that identifies the original date a transaction was entered in the electronic records, the dates of any changes to the entries, and the username of the person who made the entries. The value inherent in an examiner’s ability to obtain the date and source of recorded entries is self-evident; the information tends to support or undermine the credibility of the entries in the business records.
That I can understand. I can also make a reasonable inference as to why they might find it interesting. Many years ago when I was starting inaccounting and dinosaurs roamed the earth, manual and mechanicalaccounting systems were still quite common. With manual journals and ledgers you can see the order that things were entered and you really can’t change it. Things cannot just disappear. If they need to be corrected you need to make an entry of some sort to correct them. The general ledger was a single tangible book. I remember when data base concepts were first being introduced to small business accounting systems. The systems were sometimes focused on operational issues and had general ledgers thrown into them more or less as an after thought. If you did not run reports at the right moment, the state of subsidiary ledgers could never be recaptured. It was like never being able to step into the same river twice. I once was on the phone with a software support person, I explained that I had a number for accounts payable as of December 31 and I would like to have a list of the payables that made it up. The “answer” I received was a question – “Why would you want something like that ?”
So why might metadata be so interesting to the IRS ? In a computer environment the general ledger is not a single tangible book. It is a report that you run. The individual items can be sorted in any order that you want. So you pick the transaction date. If four months after the year end you find some invoices that should have been entered in November, you enter them with a Novemeber transaction date. If someone foolishly entered some items that were obviously repairs as items to be capitalized you don’t have to make an embarassing journal entry that sticks out like a sore thumb. Just recode the invoices and rerun the general ledger. It is conceivable that there are people who might do things like that with less than pure intent. If all the IRS gets is a printout of the final reports, they will not be able to tell how many times it changed, who changed it and when they changed it. The metadata will tell that story, which might not always be such a pretty story. With the metadata and a lot of patience you might be actually be able to step into the same river twice. If the older river was heading to a higher tax, the IRS might like that river better.
IRS examiner can summon taxpayer’s original electronic data files containing unaltered metadata as long as information in metadata “may be relevant,” within broad meaning of IRC Sec(s). 7602(a)(2) , to proper purpose for which examination is being conducted, such as correctness of return. And, taxpayer’s offer to provide copies that omit metadata or actual production thereof doesn’t restrict IRS’s authority to summon original, unaltered metadata.
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