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Business Audits: The Techniques Used by the IRS


Posted in on August 26, 2016

Many small businesses find themselves facing audits by the Internal Revenue Service. The IRS pursues small businesses because these companies often deal in cash and the taxing authorities want to make certain all income is being reported. The IRS also wants to ensure that small companies are in full compliance with the myriad of taxing regulations addressing everything from withholding of payroll taxes to submitting required quarterly tax payments.

When the IRS conducts an audit of a small business, it is important for the company owner and financial experts to understand what the IRS is looking for. An audit can hopefully end without serious consequences such as back taxes or penalties, but you need to be prepared to present information to the IRS showing you complied with tax rules.

A Maryland business tax lawyer can provide assistance in complying with your obligations initially in order to avoid audits and will help you respond assertively if you are audited. A tax attorney can also explain some of the techniques that the IRS uses during the audit process.

The IRS Publishes Audit Techniques Guides

One of the best resources for companies who either want to try to avoid an audit or who are currently being audited is the Audit Techniques Guides (ATGs) on the Internal Revenue Service website. According to the IRS: “ATGs explain industry-specific examination techniques and include common, as well as, unique industry issues, business practices and terminology.” 

The guides are intended for use by auditors during an examination because they provide insight into the types of tax issues that commonly arise for specific businesses and the types of accounting methods that are used in particular industries.

While this is their primary purpose, the open publication of the guides also makes them very useful for business owners. The guides can be consulted when preparing returns because they show what IRS investigators look for. They can also be helpful in preparing to respond to the different stages of an audit, such as preparing evidence and undergoing interviews.

The IRS has audit guides for a wide variety of industries, ranging from the aerospace industry to art galleries to companies in the entertainment industry and beyond.  Each guide is different and offers information specific to the person being audited or the type of company being audited.  For example, the guide for auditors who are investigating companies in the construction industry includes:

  • A glossary of terms used in construction
  • A discussion of contract types used in construction and development
  • Accounting methods
  • Different types of contractors
  • Joint ventures
  • A list of common errors in look-back interest filings

This construction guide is unique to that particular type of business. Each audit guide is written with the specific industry in mind in order for IRS auditors to focus their attention on the areas most likely to be problematic on a small business return.

If you run a small business, you can review these guides to find out what types of things the IRS targets.  Attorney Kevin Thorn, a business tax lawyer in Maryland, can provide invaluable assistance with this process and help make sure you do everything possible to protect your company from facing tax problems.

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