What does an IRS Revenue Agent look for when auditing a cash-intensive business? The short answer is this: correct gross receipts and reasonable accuracy of deducted expenses. But this article focuses more specifically on how IRS examines for unreported cash. You will want to understand that the IRS tax audit process is not set in stone, even though it follows a general path each time. A number of variables can trigger an audit.
Tax Audit Process
First of all, you should know that there is not one specific pattern that every Revenue Agent will follow. But generally, the IRS will briefly examine the client’s financial status to determine the course the audit will follow.
IRS auditors use a handful of tools to survey the comparative changes in income, inventory, and balance sheet items from year-to-year. These tools, called Financial Status Audit Techniques (or FSATs), are outlined within the thousands of pages of the Internal Revenue Manual (IRM), Part 4, Examinations.
For these cash-intensive businesses, the auditor will initially focus on Minimum Income Probes, shown under IRM 4.10.4. This 128-page, set of IRS procedures is a difficult read (for sure), but these knowing procedures are absolutely required for competency in representing businesses that handle significant volumes of cash.
IRS Audit Items
What are some of the items the IRS audit agent will consider as part of the government’s exam? The simplest items to consider will be most obvious, including:
• Imbalance in Cash Flows
• Business and Owner Spending Patterns
• Accumulation of Wealth
• Financial History
• Business Owner’s Living Expenses
But related to gross income, the agent will begin by gathering information, and then testing:
• Evaluating the Business’ Internal Controls
• Reconciling Income to Books
• Testing Gross Receipts
• Analyzing Bank Accounts, and even
• Analyzing Key Business Ratios
These techniques are quite different than typical internal or independent audit techniques. IRS agents are aggressively trained on these Minimum Income Probes, and actually, develop this knowledge over a period of years.
IRS Tax Representation
Because of the detailed review by the auditor, the client needs a representative that has a strong knowledge background of these same IRS techniques. Otherwise, the tax representative cannot be effective. Since most tax accountants have never been exposed to these specific procedures, taking the role of the representative must be carefully considered. And the wisest among CPA’s and tax accountants know to avoid handling these audits as well because there is also such a great exposure to professional malpractice.
To best assist, your tax client must have the business immediately engage a lawyer that is knowledgeable of procedures under the Internal Revenue Manual, Part 4, Examinations. Be certain that the attorney is hired before anyone is interviewed by IRS. Then, the attorney might even engage the return preparer to provide support services related to the audit.
Every audit of cash-intensive businesses reveals unexpected facts, events, and behavior. Yes, there are always surprises related to cash! No CPA needs to gamble with his/her license, on the risks of a client’s unknown conduct regarding cash. When asked for help with the IRS tax audit, the CPA best serves the client by identifying a tax lawyer for representation. And don’t forget to find an attorney that is competent with IRS’s examination procedures.
Find The Best Tax Representation
Now that you are aware of the general IRS tax audit process, it’s time to find tax representation. You can go online and search “tax attorney near me,” or you can simply contact Tax Law Offices in Naperville. We serve Chicagoland area with expertise and knowledge earned through representing clients. Remember, you’re not alone in this process, and you should not take on the IRS alone. It’s simple: schedule a consultation today!