In chess (as in business), it’s good to be able to think three moves ahead. This is especially true when dealing with IRS auditors. Wouldn’t it be nice if you could read the plan on how they’ll review your books weeks before they came for their appointment? Well wish no more – this information is public knowledge and available with a click or two of your mouse! We’ll show you how to obtain the IRS guide your auditor will use in just a moment.
Now your Businesses can utilize the same information IRS auditors use to examine tax returns!
The IRS uses Audit Techniques Guides (ATGs) to help IRS examiners get ready for audits. Your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.
Many guides target specific industries or businesses, such as construction, aerospace, art galleries, childcare providers and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses, and capitalization of tangible property.
How they’re used
IRS auditors need to examine all types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices, and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers may not be in compliance.
By using a written audit guide, IRS has a consistent approach and may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify the variances within the geographic area in which the business is located.
For example, one guide focuses specifically on businesses that deal in cash, such as auto repair shops, car washes, check-cashing operations, gas stations, laundromats, liquor stores, restaurants., bars, and salons. The “Cash Intensive Businesses” ATG tells auditors “a financial status analysis including both business and personal financial activities should be done.” It explains techniques such as:
- How to examine businesses with and without cash registers,
- What a company’s books and records may reveal,
- How to analyze bank deposits and checks written from known bank accounts,
- What to look for when touring a business,
- Ways to uncover hidden family transactions,
- How cash invoices found in an audit of one business may lead to another business trying to hide income by dealing mainly in cash.
Auditors are obviously looking for cash-intensive businesses that underreport their cash receipts but how this is uncovered varies. For example, when examining restaurants or bar, auditors are told to ask about net profits compared to the industry average, spillage, pouring averages, and tipping.
Learn the red flags (from the IRS’ guides) and avoid the audit in the first place!
Although ATGs were created to help IRS examiners ferret out common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. Contact us if you have questions about your business. To access the IRS training materials and audit guides:
use this link
He is also a founding Board Member and Finance Director of the Fayette Pregnancy Resource Center and serves on the Board of the National Equal Rights Institute.
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