Auditors with the Internal Revenue Service (IRS) use publications called audit technique guides (ATG) to help prepare them to conduct a tax audit. Under IRS regulations, businesses can use the same guides to check for compliance. The IRS offers ATGs in multiple categories such as type of business and special situations. Common examples of the latter include capitalization of tangible property, executive compensation, and passive activity losses.

How IRS Auditors Use ATGs

IRS auditors must know the ins and outs of hundreds of different industries to ensure they audit a business properly. Since retaining so much information is impossible, the ATGs outline issues unique to the industry as well as terminology and best business practices. If an auditor meets with a taxpayer and the accountant representing them, he or she must spend considerable time determining where the taxpayer is out of compliance before the meeting. This requires the auditor to know how businesses in the industry typically collect and account for revenue.

Assume that an auditor is reviewing the tax return for a business that only accepts cash payments. He or she would use an ATG entitled The Cash Intensive Business to know what to look for during the audit. The following are just several examples of the multiple techniques this ATG would provide to the IRS auditor:

  • Examining the business properly depending on whether it does or doesn’t use cash registers.
  • Uncovering one cash business hiding income for another cash business by conducting an in-depth review of cash invoices. Business owners may also use the cash method to hide their own income.
  • Unexpected discoveries the auditor may encounter when reviewing a company’s records and books.
  • Best practices for analyzing checks written and deposits made to specific bank accounts.
  • Methods used to uncover hidden family transactions.
  • Out-of-the-ordinary things to watch for when touring a business in person.

As a small business professional, you or your accountant can use the same guides as IRS auditors by navigating to the Audit Techniques Guides (ATG) of the IRS website. Each guide lists the month and year of the last update to help people interested in using the guides know that they’re using the most current information available.

Avoid a Tax Audit Yourself

When you think like an IRS auditor and prepare your business tax returns like one, it’s far less likely that the IRS will choose your return for a future tax audit. If you’re not up to the task yourself, we invite you to schedule an appointment for tax preparation with Chicagoland CPAs. We also offer numerous other services to business owners such as IRS problem resolution, retirement planning, business valuations, debt restructuring, payroll, strategic tax consulting, financial statement separation, and several others. We look forward to saving you money on your business tax return.