Have you ever wondered how IRS examiners stay up to date on industry trends so they can audit a wide range of businesses? Typically, they use IRS Audit Techniques Guides (ATGs) to conduct research on certain industries and concerns related to tax returns. It is a little-known truth that the IRS website makes these guides available to the general public. That means your company can utilize these same tools to learn what the IRS considers to be compliance with tax laws and regulations.
Many ATGs target specific industries or businesses, such as construction, aerospace, art galleries, architecture and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.
How ATGs are Used to Help With Compliance With Tax Laws
All varieties of enterprises, as well as individual taxpayers and tax-exempt organizations, must be examined by IRS auditors. There may be specific industry challenges, business processes, and language associated with each type of return. Auditors do their homework to learn about different industries or concerns, the generally used accounting techniques, how revenue is collected, and areas where taxpayers could not be in compliance before meeting with taxpayers and their advisors.
When reported income or expenses don’t match industry norms, an IRS auditor may be able to use a particular ATG to uncover anomalies in the business’s local area or to reconcile differences.
For example, one ATG focuses specifically on businesses that deal in cash, such as auto repair shops, car washes, check-cashing operations, gas stations, laundromats, liquor stores, restaurants, bars and salons. The “Cash Intensive Businesses” ATG tells auditors that “a financial status analysis including both business and personal financial activities should be done.” It explains techniques such as:
- How to examine businesses with and without cash registers
- What a company’s books and records may reveal
- How to analyze bank deposits and checks written from known bank accounts
- What to look for when touring a business
- Ways to uncover hidden family transactions
- How cash invoices found in an audit of one business may lead to another business trying to hide income by dealing mainly in cash
Auditors are obviously looking for cash-intensive businesses that underreport their cash receipts, but how this is uncovered varies. For example, when examining a restaurants or bar, auditors are told to ask about net profits compared to the industry average, spillage, pouring averages and tipping to ensure compliance with tax laws.
Updates and revisions
Some guides were written several years ago and others are relatively new. There is not a guide for every industry. Here are some of the guide titles that have been revised or added recently:
- The March 2023 Entertainment Audit Technique Guide which addresses earnings and out-of-pocket costs for actors, directors, producers, technicians, and other personnel in the motion picture and record industries as well as live performances;
- The September 2022 Capitalization of Tangible Property Audit Technique Guide discusses possible tax ramifications for capital expenditures and property sales.
- The Oil and Gas Audit Technique Guide (February 2023), which provides an explanation of the intricate tax implications related to the discovery, development, and extraction of natural gas and crude oil;
- Cost Segregation Audit Technique Guide (June 2022), which explains to IRS examiners the rationale for and methods of conducting cost segregation studies for the purpose of enabling firms to submit claims for reimbursements associated with depreciation deductions.
- The January 2022 Attorneys Audit Technique Guide addresses a variety of topics including retainers, contingent fees, client trust accounts, and travel costs;
- The Child Care Provider Audit Technique Guide (January 2022), which gives IRS inspectors the ability to audit companies that offer daycare or in-home care; and
- Retail Audit Technique Guide (March 2021), which describes specific tax concerns for companies who buy goods wholesale or from suppliers and resell them for a profit.
Learn the red flags
Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website here. And if you have questions about your business or compliance with tax laws and regulations, please contact us.
This post was originally published on 7/24/2019 and updated on 8/31/2021 and 10/10/2023.