IRS Audit Techniques Guides Provide Clues to What May Come Up If Your Business Is Audited

IRS examiners use Audit Techniques Guides (ATGs) as they get ready for audits — and small business owners might want to, as well. Numerous ATGs focus on specific industries, like construction. Some zero in on issues that come up in audits quite frequently, like fringe benefits and executive compensation. These materials can offer valuable insights into any problems that might emerge should your company be audited.

What do ATGs cover?

ATGs are an assortment of published findings collected by the IRS and include information from past taxpayer investigations. These publications generally explain:

  • The nature of the industry or issue,
  • Accounting methods commonly used in an industry,
  • Relevant audit examination techniques,
  • Common and industry-specific compliance issues,
  • Business practices,
  • Industry terminology, and
  • Sample interview questions.

For instance, with the help of a particular ATG, an examiner could reconcile inconsistencies occurring when reported income or expenses aren’t congruent with industry norms or to detect anomalies within the within the geographic area in which the taxpayer resides.

What do ATGs advise?

ATGs go over what kinds of documentation IRS examiners will ask taxpayers to provide and what relevant information could come to light during a tour of the place of business. To some extent, these guides were designed to assist examiners in locating potential sources of income that could have otherwise slipped by unnoticed.

ATGs may also lead examiners to look into other issues, including:

  • Internal controls (or lack of controls),
  • The sources of funds used to start the business,
  • A list of suppliers and vendors,
  • The availability of business records,
  • Names of individual(s) responsible for maintaining business records,
  • Nature of business operations (for example, hours and days open),
  • Names and responsibilities of employees,
  • Names of individual(s) with control over inventory, and
  • Personal expenses paid with business funds.

For instance, one ATG concentrates primarily on cash-intensive businesses, like gas stations, salons, check-cashing operations, restaurants and bars, liquor stores and auto repair shops. For these kinds of businesses, it stresses the criticality of going over cash receipts and cash register tapes.

The temptation exists for cash-intensive businesses to underreport their cash receipts, but to impede any “skimming,” franchised operations may have internal controls in place. For example, a franchisor may require the franchisees to purchase all products or goods from him or her, leaving a paper trail with which to verify sales records.

Similarly, examiners must ask restaurants and bars about net profits compared to the industry average, pouring averages, spillage and tipping. Regarding gas stations, examiners should check the methods of determining income, rebates and other incentives.

Avoiding red flags

ATGs may have been formed solely to improve IRS examiner proficiency, but they are also great for small businesses, helping them to safeguard against engaging in practices that might raise red flags with the IRS. Visit the IRS website for the entire list of ATGs. And for more information on the IRS red flags that may be relevant to your business, please call us at (818) 334-8623 or click here to contact us.