Businesses Can Utilize The Same Information IRS Auditors Use To Examine Tax Returns


small business audit requirementsThe IRS uses Audit Techniques Guides (ATGs) to help IRS examiners get ready for audits. Your business can use the same guides to gain insight on your small business audit requirements, by seeing what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries or businesses, such as construction, aerospace, art galleries, child care providers and veterinary medicine. Others address issues that commonly arise in an IRS audit, such as executive compensation, passive activity losses and capitalization of tangible property.

How To Use ATGs for Small Business Audit Requirements

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. Examples include the accounting methods commonly used for keeping tax records, how income is received, and areas where taxpayers may not be in compliance.

By using a specific ATG, an auditor may be able to reconcile discrepancies when reported income or expenses are lacking consistency. Inconsistencies include seeing the industry norm or identifying anomalies within the geographic area in which the business is located.

For example, one ATG 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. This is especially noticeable when the other business is 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 a restaurants or bar, auditors are told to ask about net profits. A few comparisons that auditors make on net profits include industry average, spillage, pouring averages and tipping.

Learn The Red Flags

ATGs are meant to help IRS examiners ferret out common methods of hiding income and inflating deductions. However, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. Contact us if you you would like to learn more on what to expect during an IRS audit or have questions about your business. For a complete list of ATGs on small business audit requirements, visit the IRS website here.