In general, taxpayers, are in a partnership with the Internal Revenue Service. However, unlike the case of traditional partnerships in which two or more taxpayers mutually agree on the terms of the partnership, in this partnership with the IRS, the IRS sets the rules to share the profit or income with the Treasury according to the partnership agreement, in this case, the Internal Revenue Code and Treasury Regulations.
To ensure that taxpayers fairly share their income, the Internal Revenue Service can audit their tax returns. Knowing what the IRS will look for during an audit and getting prepared in case of an audit save taxpayers time and money because tax audits can go on for months or even years depending on the case. The time and resources spent preparing for and participating in an IRS audit are time and resources that are not available for you to run your business or your personal affairs. Therefore, taxpayers should consider 1) keeping good records, 2) ensuring that the tax return is legally prepared, which means that the taxpayer could attest to the accuracy of the position or items on the return, and 3) knowing the IRS audit process.
When a taxpayer is audited, the letter from the IRS states what the IRS is looking for. The IRS provides an extensive documentation on what an IRS examiner should look for. Fortunately, this valuable information is available to the taxpayer.
There are two important documents that the IRS uses in the audit procedure:
1) the Internal Revenue Manual (IRM), and 2) the Audit Techniques Guides (ATGs). Both documents are available on the IRS website.
As stated by the Service, the IRM provides an overview of the responsibilities that examiners should understand and apply in the performance of their duties. Simply put, it is a roadmap that shows how the IRS applies the provisions of the tax laws to collect their share of revenue from the partnership the IRS has with taxpayers.
The IRM consists of several parts. Part 4 of the IRM in chapter 10 explains the steps that the examiners should follow in the examination of a return.
The Internal Revenue Service publishes Audit Techniques Guides (ATGs) for many industries, ranging from the aerospace industry to the wine industry. The guides are constantly reviewed and updated
The ATGs explain industry-specific examination techniques; common and unique industry issues, business practices, and terminology; how to examine income and deductions, interview the taxpayer, and evaluate evidence.
You, as a business owner, as a taxpayer, can not only learn what the IRS is going to do and why, but also find crucial information on practical procedures and techniques that are common to your industry or your case. For example, when the IRS conducts an in-person audit of a retailer’s business returns, it is looking to verify the accuracy of the business’s tax return and the sources of gross income. In addition to giving the IRS examiner some general interview questions common to all retail industries, the retail ATG has questions relating to specific segments of the retail industry. For individuals, the IRS could look at living style and expenses.
Why would a taxpayer be concerned about the IRS Internal Revenue Manual and IRS Audit Techniques Guides?
Preparing most tax returns is not as simple as some taxpayers would believe. A taxpayer might think his return, or her return is simple while it is, in fact, a complicated one because there are complexities in knowing what qualified as legitimate deductions and how they are claimed on the various tax forms. Many times, taxpayers are audited for claiming credits and deductions that they are not qualified for while they missed some legitimate ones. The answers to some deductions are not found in tax statutes, or even in case law.
- The IRM provides a step-by-step approach along with many scenarios and alternative on how to resolve tax issues.
- The ATGs help taxpayers by giving them insights into various deductions and options that can apply. The ATGs contain a wealth of information on how the IRS conducts audits for attorneys, cash intensive businesses, auto body/repair, business consultants, childcare providers, construction industry, grocery stores, electronic business, online retail, mobile food vendors, motor vehicle dealerships, taxability of lawsuits, awards and settlements, ministers, and more.
As the service indicated, the initial interview in the audit process is an important element of any examination and it sets the stage for the rest of the examination. Therefore, it is recommended that taxpayers seek a qualified tax professional who could represent them before the Internal Revenue Service because do it alone might cost taxpayers more.
Are you among taxpayers who do not open IRS letters? Were you told by a tax preparer “I will take care of it“? If you have an audit letter or letters sitting around, do not wait any longer! Seek professional assistance from an enrolled agent, a CPA, or a tax attorney. Only enrolled agents, CPAs, and tax attorneys could represent taxpayers before the Internal Revenue Service with a proper power of attorney.
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