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  • Writer's pictureMMH CPA

Peek Inside the Mind of an IRS Auditor

While most of us are never audited, it can feel overwhelming when it does happen. Remember that the IRS auditor performs these audits every day. They know what to look for, and may ask leading questions that are easy to answer incorrectly.

If you face an audit, it's worth reviewing the IRS's Audit Techniques Guides which instruct auditors how to handle tax issues for many different business fields and can inform you about how they are thinking.

Here are some tips for anyone in the crosshairs of an IRS audit:

Timely address correspondence. Do not let any issues raised in an IRS correspondence letter get to a point where a face-to-face examination is required. Most notices allow about thirty days to respond, but each correspondence window can be different.

Ask for help right away. Too many taxpayers think the problem is easy to resolve, but inadvertently say the wrong thing, resulting in another audit issue. Save yourself additional headaches by asking for assistance early in the process.

Understand what's being asked. Clearly understanding the core question behind the audit can simplify the solution. Why is the IRS asking to see your 1099s? Do they have a form that you do not? Why are they asking about your small business profits? Are they thinking your business is a hobby?

Think like an IRS auditor. The IRS focuses auditor training in several areas which are published in the Audit Techniques Guides (ATGs). They are invaluable in identifying areas for potential audits, and can help you understand what the IRS auditors are instructed to question.

While most of the ATGs deal with business taxation, reviewing the topics can be useful in understanding where audit risks are most likely and what you can do to prepare yourself in case of an audit.

Common Audit Techniques Guide Topics:

  • Architects

  • Art Galleries

  • Attorneys

  • Business Consultants

  • Capitalization versus Repairs

  • Cash-Based Business

  • Child Care Provider

  • Construction

  • Research Credits

  • Farmers

  • Hobbies (activity not engaged for profit)

  • Lawsuit Awards and Settlements

  • Ministers

  • Partnerships

  • Retail

  • Veterinary Medicine

  • Wineries and Vineyards

If you have one or more business activities that touch any of these topics, it makes sense to understand how IRS auditors are trained. By reviewing the specific ATG, you can understand the process of an IRS audit and gain some insight into how the auditor will proceed.

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