IRS examiners usually do their research before heading to meet the taxpayers and also their representatives. The research includes going through any relevant Audit Techniques Guides that focus on a specified industry or an audit-prone transaction. It is designed to assist IRS Audit examiners in preparing audits. In addition, ATGs are present for the public. So, small business taxpayers can also review them and have some valuable knowledge into the issues during audits.
What Do ATGs Have?
The IRS gathers and stores the information from the past examinations of taxpayers. Then from the relevant information, they publish their findings in the Audit Technique Guide. Then these publications let you know:
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The nature of the specific industry or the issue
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Accounting methods used commonly in an industry
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Audit Examination Techniques which are relevant
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Industry-Specific Compliance and common issues
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Business Practices
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Industry terminology
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Sample interview questions
By using a specific ATG, the examiner can reconcile the discrepancies when the income and expenses are inconsistent with what is standard for the industry or recognize anomalies within the geographic area where the taxpayer lives.
Why Are You Getting Audited?
It does not explicitly mean that something is wrong with being audited and doesn’t signify that you have made an error. The IRS has several selection methods when choosing who to audit.
Method #1: Selected randomly or through a computer screening
The IRS is known to have a statistical formula when deciding whom to audit. For example, they might think that 1 in 100 returns are fraudulent, so they have made a formula that selects 1 in every 100 returns. It is to explain the concept, not referring to how the formula works.
Method #2: Through correlation
You might get audited because of your involvement with an individual, for example, a business partner or an employee. After being chosen for the audit, the auditor will go through your return, and if they think of accepting it for any reason, they will forward your return to an examining group for further review.
So even if you get audited, it doesn’t mean that you made an error on your part. However, with that being known, it is better not to have any kinds of mistakes when you prepare your taxes.
What Do ATGs Advise?
ATGs have many kinds of documentations that IRS examiners would request from the taxpayers and other relevant material uncovered from a tour of the business premises. In addition, the premises guides help examiners recognize potential flows of income that could get hidden if not scoured.
What to Expect During IRS Audit?
What to look out for during an IRS audit that ATGs might lead the examiners to inquire about include:
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Internal controls (or lack of controls)
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The sources of funds initially used to start the business
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A list of suppliers and vendors.
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The availability of business records
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Names of individual(s) who are responsible for maintaining business records
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Nature of business operations
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Names and responsibilities of each employee
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Names of individual(s) who have control over inventory
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Personal expenses are paid with business funds
E.g., one ATG might focus on cash-intensive businesses. This would include auto repair shops, gas stations, check-cashing operations, etc. This ATG would highlight the significance of going through cash receipts and cash register tapes for these businesses.
Cash intensive businesses may sometimes be tempted not to report some of their cash receipts, but franchised operations can have internal controls set in place to identify such “skimmings.” For example, a franchisee may need to buy goods or products from a franchisor, which offers a paper trail and verifies the sales records.
How Many Years Back Can the IRS Go into Your Audit?
The IRS can go back as many years as they want to. The farther back they go, it will take them a significant amount of time and effort and ineffective for them.
Generally, they won’t go farther than 2 to 6 years. They add more years when they find substantial errors. The IRS tries to make an effort to audit your tax returns as soon as you have filed them. Most likely, you can be audited anytime in the past two years. If your audit is not resolved, they have the authority to increase the number of years they can back, also known as a statute of limitations. The statute of limitations is known to secure you from the IRS from going back too many years, which they can also override. The statute stops the IRS from going back to three years after a return was due or got filed, whichever one was later.
