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How IRS Auditors Learn About Your Business Industry

Ever wonder how IRS examiners know about different industries so they can audit various businesses? They generally do research about specific industries and issues on tax returns by using IRS Audit Techniques Guides (ATGs). A little-known fact is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries, such as construction, aerospace, art galleries, architecture and veterinary medicine. Other guides address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

Issues unique to certain taxpayers

IRS auditors need to examine all different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.

By using a specific ATG, an IRS auditor may be […]

By Linkenheimer LLP|2023-10-11T18:36:38+00:00October 11th, 2023|audit, irs|0 Comments

M&A On The Way? Consider A QOE Report

Whether you’re considering selling your business or acquiring another one, due diligence is a must. In many mergers and acquisitions (M&A), prospective buyers obtain a quality of earnings (QOE) report to evaluate the accuracy and sustainability of the seller’s reported earnings. Sometimes sellers get their own QOE reports to spot potential problems that might derail a transaction and identify ways to preserve or even increase the company’s value. Here’s what you should know about this critical document.

Different from an audit

QOE reports are not the same as audits. An audit yields an opinion on whether the financial statements of a business fairly present its financial position in accordance with Generally Accepted Accounting Principles (GAAP). It’s based on historical results as of the company’s fiscal year end.

In contrast, a QOE report determines whether a business’s earnings are accurate and sustainable, and whether its forecasts of future performance are achievable. It typically evaluates performance over the most recent interim 12-month period.

EBITDA effects

Generally, the starting point for a QOE report is the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Many buyers and sellers believe this metric provides a better indicator of a business’s ability […]

By Linkenheimer LLP|2022-10-12T21:29:02+00:00October 12th, 2022|M&A|0 Comments

Worried About An IRS Audit? Prepare In Advance

IRS audit rates are historically low, according to a recent Government Accountability Office (GAO) report, but that’s little consolation if your return is among those selected to be examined. Plus, the IRS recently received additional funding in the Inflation Reduction Act to improve customer service, upgrade technology and increase audits of high-income taxpayers. But with proper preparation and planning, you should fare well.

From tax years 2010 to 2019, audit rates of individual tax returns decreased for all income levels, according to the GAO. On average, the audit rate for all returns decreased from 0.9% to 0.25%. IRS officials attribute this to reduced staffing as a result of decreased funding. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, all types of audits are being conducted less frequently than they were a decade ago.

There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, the best way to survive an IRS audit is to prepare in advance. On an ongoing basis you should systematically maintain documentation — invoices, bills, cancelled checks, receipts, or other proof — for all […]

By Linkenheimer LLP|2022-10-03T19:48:33+00:00October 3rd, 2022|audit, irs|0 Comments

Keeping Meticulous Records Is The Key To Tax Deductions And Painless IRS Audits

If you operate a business, or you’re starting a new one, you know you need to keep records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns in case you’re ever audited by the IRS.

Be aware that there’s no one way to keep business records. But there are strict rules when it comes to keeping records and proving expenses are legitimate for tax purposes. Certain types of expenses, such as automobile, travel, meals and home office costs, require special attention because they’re subject to special recordkeeping requirements or limitations.

Here are two recent court cases to illustrate some of the issues.

Case 1: To claim deductions, an activity must be engaged in for profit

A […]

By Linkenheimer LLP|2022-02-02T21:11:38+00:00February 2nd, 2022|audit, deduction, deductions, irs|0 Comments

Commission Fraud: When Salespeople Get Paid More Than They’ve Earned

Many employees — from retail workers to sales staffers involved in complex business-to-business transactions — receive part of their compensation from sales-related commissions. To attract and retain top talent, some companies even allow employees to earn unlimited commissions.

Unfortunately, some commission-compensated employees may be tempted to abuse this system by falsifying sales or rates. Fraud methods vary depending on an unethical salesperson’s employer and role. But companies need to be aware of the possibility of commission fraud and take steps to prevent it.

3 forms

Generally, commission fraud takes one of three forms:

Invention of sales. A retail employee enters a fake purchase at the point of sale (POS) to generate a commission. Or an employee involved in selling business services creates a fraudulent sales contract.
Overstatement of sales. Here, a worker alters internal sales reports or invoices or inflates sales captured via the company’s POS.
Inflation of commission rates. An employee changes a company’s commission records to reflect a higher pay rate. Employees who don’t have access to such records might collude with someone who does (such as an accounting staffer) to alter compensation rates.

More sophisticated schemes can involve collusion with customers and other outside […]

By Linkenheimer LLP|2022-01-07T20:21:59+00:00January 7th, 2022|fraud|0 Comments