Business owners hate tax audits. It’s not only the potential bills for unpaid taxes, interest and penalties, it’s also the additional time involved, as audits can go on for months or even years. Time and resources spent preparing for, and participating in an IRS audit is time and resources that are not available for you to run your company.
Fortunately, the IRS publishes a series of Audit Technique Guides (ATGs) to help IRS examiners during audits. These ATGs are useful for business owners as they provide insight into issues and accounting methods unique to their specific industries.
Currently, the IRS has ATGs for about 50 various industries, ranging from the aerospace industry to the wine industry on their web site as PDF documents, web pages, or both. The ATGs explain industry-specific examination techniques and include common, as well as, unique industry issues, business practices and terminology. They also provide guidance on the examination of income, interview techniques, and evaluation of evidence. The recently-updated retail industry ATG provides guidance on conducting income tax examinations in the retail industry, incorporating practical procedures and techniques that are common to today’s retail environments, such as business operations, inventory valuation, control procedures, cash-on-hand, and personal expenditures.
When the IRS agents conduct an in-person audit of a retailer’s business returns, they are looking to verify the accuracy of the business’s tax return and the sources of gross income. In addition to general interview questions common to all retail industries, the retail ATG contains particular questions relating to specific segments of the retail industry. For example, there are individual chapters devoted to the audit techniques for the following specific types of retail businesses:
- Auto Body/Repair
- Direct Sellers
- Electronic Business and Online Retail
- Gasoline Service Stations
- Grocery Stores
- Mobile Food Vendors
- Motor Vehicle Dealerships
- Retail Liquor Sales
The IRS agents will examine the retailer’s ledgers, bank statements, invoices and receipts to see if it reported all its income, and if the expenses it claimed are legitimate. Thus, IRS auditors will conduct minimum income probes during every examination. If the minimum income probes and examination of gross receipts show all taxable income from known sources is reported, the examination may be limited at that point. On the other hand, the IRS will undertake a more in-depth examination of income if the results indicate the potential of unreported income due to inaccurate reporting of taxable income from known sources; the books cannot be reconciled to the return; or a material imbalance in the financial status analysis cannot be reconciled.
As a business owner or tax professional who prepares business tax returns, you are aware that preparing tax returns is complicated. Not because the math is difficult, or that the accounting procedures are complicated, but that there are complexities in knowing what legitimate deductions are, and how they are claimed on the various tax forms. Generally, these answers are not found in tax statutes, or even in the case law. What you really want to know is how the IRS agents interpret tax statutes and case law as it applies to your business.
The ATGs will help you prepare if you receive the dreaded audit letter from the IRS, as it is the roadmap the IRS auditor will follow to conduct your audit. Knowing the questions and areas that the auditor will cover in the examination will help you prepare appropriate answers and documentation. A thorough preparation will minimize the need for follow-up meetings and scrambles to assemble missing documentation.
In conclusion, the IRS Audit Technique Guides provide valuable insights as to how the IRS conducts audits of retail businesses and help in preparing for an audit of your business. They are also useful in developing financial best practices for your business.
Willi Law Office, LLC has been providing personalized legal services to individuals and businesses in Westerville and Central Ohio for over 20 years.