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Do homework on Audit Technique Guides

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The IRS has developed Audit Technique Guides (ATGs) to assist its examiners. These ATGs focus on specific industries or tax issues.

Strategy: Research the applicable ATGs. Most ATGs are available to the general public.

The IRS periodically updates its ATGs and adds to the list. For instance, the first new ATG publicly released in 2017 was devoted to “golden parachutes” paid to executives.

Here’s the whole story: For years, IRS examiners were randomly assigned to cases, without any real consistency. One day an examiner might be auditing a physician and the next a dry cleaner. Thus, it was difficult to develop any real expertise within any one industry or profession.

But then the IRS developed its Market Segment Specialization Program (MSSP) in the 1990s. As part of the MSSP, IRS personnel compiled information about specific industries and tax issues and incorporated the findings in ATGs. The idea was to give examiners a leg up during audits and help them pinpoint potential trouble spots.

Typically, an ATG will include audit techniques that may be used by examiners, unique industry issues, business practices, industry terminology, sample interview questions and procedures and other related items.

Armed with an industry-specific ATG, an IRS examiner can reconcile discrepancies when reported income or expenses don’t jibe based on the usual standards in an industry or for a comparable business in the same geographic area. Over time, the ATGs are modified based on input from IRS reps. As a result, this streamlines procedures and makes the auditing process more efficient.

Some of the items commonly included in an ATG for a small business are a discussion of:

  • Internal controls
  • Source of funds used to start the business
  • A list of suppliers and vendors
  • Details on business operations
  • Key business records for the industry
  • Records of cash receipts and credit card charges
  • Number of employees and their responsibilities
  • Identification of individuals with control over payroll.

Also, the IRS looks for instances where business funds are used to pay for personal expenses.

Although ATGs are intended to help IRS examiners, taxpayers can also benefit. They can alert you to what interests the IRS during an audit and identify situations that could raise red flags.

Tip: To refer to the list of ATGs, visit www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Audit-Techniques-Guides-ATGs.

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