Extra, Extra: Read All About IRS Audits
Based on the guidelines in an industry-specific ATG, an IRS examiner can better reconcile discrepancies when reported income or expenses don’t match based on the usual standards in an industry or for a comparable business in the same geographic area.
Sep. 15, 2021
You may have wondered this from time to time: If only the IRS would let me know what it is looking for when it audits individual taxpayers and small businesses. Well, guess what? In effect, it does. You can read about all about the IRS philosophies relating to various issues and specific industries in the “Audit Technique Guides” (ATGs) it provides and regularly updates.
These informative guides have been developed to assists IRS auditors out in the field, but they are not the exclusive property of the agency. The ATGs are available to the general public. Therefore, they can help tax practitioners and regular people like yourself as well as IRS agents.
In fact, if you peruse an ATG targeted to your industry or profession, you may even be able to avoid a future audit by sidestepping potential landmines.
How did ATGs come about? For decades, IRS examiners were randomly assigned to a series of cases, without any real rhyme or reason. For instance, an auditor might be instructed to examine a plumber one-day and an architect the next. There was no consistency
However, in the nineties the IRS established its Market Segment Specialization Program (MSSP). As part and parcel of the MSSP, IRS staffers compiled information about specific industries and tax issues and incorporated some of these findings in ATGs. The idea was to give examiners more information during audits and help them pinpoint potential “danger zones.”
Typically, an ATG will include audit techniques that may be used by examiners, unique industry issues, business practices, specialized industry terminology, sample interview questions and procedures and other related items. The IRS is constantly adding to the list and refining its roster of guides. For instance, in May, 2021, it published a revised ATG for the construction industry.
Based on the guidelines in an industry-specific ATG, an IRS examiner can better reconcile discrepancies when reported income or expenses don’t match 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, procedures have been streamlined and the auditing process is more efficient. This is especially important at a time when the IRS is under-staffed.
Some of the items commonly included in an ATG for a small business are as follows:
- 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.
Warning: The IRS is on the lookout for instances where business funds are used to pay for personal expenses. This is a strict no-no and likely to merit further attention.
Remember that you can benefit from ATGs as well as IRS personnel. A guide can give a head’s up about what will interest the IRS during an audit and indicate situations that could raise red flags. To get the full lowdown, visit https://www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-guides-atgs or enlist the services of your tax advisor.