Audits by the Internal Revenue Service (IRS) can be the bane of any business. The time and expense alone can be a devastating blow. Knowing in advance what can trigger an audit and what auditors are looking for if you do get audited can help you structure your systems to clearly demonstrate the validity of your business practices.
The IRS is currently developing plans to increase tax collections. One area of particular focus is individuals with incomes exceeding $100,000, especially business owners, professionals and investors in partnerships. Small businesses are perceived as being major offenders in noncompliance with tax laws because many have cash components which are not well documented and have loose employee record keeping procedures. The agency estimates that small businesses have 4-60 transactions per year with the IRS paying $915 billion in taxes, nearly 44 percent of the money collected, a significant portion of the tax base for this country.
The enforcement plan for small business, while a cause for concern, also offers some new opportunities. In a move to better relate to specific needs of different tax payer groups, the IRS has created a Small Business and Self-Employed Operating Division which they plan to have operational by October, 2000. Their goal is to help entrepreneurs comply with tax laws. They have also developed Market Segment Specialization Program (MSSP) to help auditors have a better understanding of different industry issues. The MSSP focuses on developing highly trained examiners for a particular market segment. A market segment may be an industry such as construction or entertainment, a profession like attorneys or real estate agents or an issue like passive activity losses. The IRS works with industry groups and associations to address industry concerns in relation to taxation of businesses in that industry.
One component of MSSP is the development and publication of Audit Techniques Guides. These guides contain examination techniques, common and unique industry issues, business practices, industry terminology and other information to assist examiners in performing examinations. The audit guides are written so that auditors know what practices to look for in auditing a business. However, the guides are available to any business owner. So they are a gold mine of information to help you operate your business from a tax standpoint to keep the auditors away from your door. The guides are relatively technical since they are written for auditors. Sharing the information with your accountant may be wise to obtain clarification on some of the issues they raise.
Currently there are a wide variety of guides with research underway on a number of other market segments. Even if a guide does not exist for your particular industry, it can be useful to read one for similar industry to learn what expectations the IRS has for operating your business.
Check out the list of guides to see if there is one for your business.