Audit-Proofing Your Business

The IRS provides instructions to its examiners on how to audit businesses within specific industries through Audit Technique Guides. These guides cover common and unique industry issues, business practices, industry terminology, and other information to assist examiners in performing examinations.

These guides are available to the public and can be used by business owners to learn what the IRS is looking for so they can, to some extent, audit-proof their businesses, or at least be prepared in case of an audit. For example, in the case of a pizzeria, the agent seeking to determine whether all income has been reported when books and records are incomplete will look at cash register receipts and bank deposits. The agent can also work backward to figure out how much the pizzeria should have earned based on the amount of flour and other supplies the business has purchased. Lesson for pizzeria owners: Keep complete records to have on hand in case of an audit.

The IRS has come out with a number of guides this year that cover the following specific industries and issues; if you are in one of these industries (or in an industry that already had a guide), it is useful to review the guides so you can conduct your business in an audit-proof way:

  1. Child care providers.
  2. Construction industry (for contractors large and small).
  3. Hobby activities (activities engaged in without a profit motive).
  4. Retail industry, including specific segments for e-commerce, videos, gasoline service stations, independent automobile dealerships, direct sellers, auto repair shops, retail liquor stores, mobile food vendors, pizzerias, restaurants and bars, and grocery stores.

Be sure to work with a knowledgeable tax professional who can make sure your records and receipts meet IRS requirements.

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