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IRS Audit Guides

© John A. Tyler
Most taxpayers know that the IRS conducts regular audits of tax returns to determine if a taxpayer has accurately reported taxable income and paid the correct amount of taxes.

What many taxpayers do not know is that the IRS has published audit guides covering many business segments, from Art Galleries to Farmers, to Veterinarians.

These audit guides are written extensively in great detail. For example the guide for Business Consultants contains more than 1,000 lines of text. In the audit guide for business consultants, there is an interesting paragraph:

“Electronic Software”

“It has been estimated up to 75% of small medium sized businesses use electronic accounting software to maintain their books and records. Most accounting software programs can generate a large number of pre-set reports. Each report can be modified to fit the examiner’s needs. When working with these reports within the accounting software program, the examiner can “drill down” to the underlying data and documents to further investigate items, as appropriate. In the majority of audits, examiners should request a copy of the taxpayer’s original accounting software backup file as reviewing the electronic records should make the audit more efficient.”

The power of an IRS auditor to obtain a copy of a company’s general ledger, which may contain records and transactions before and after the year chosen for the IRS exam is a controversial issue. The IRS has held that even though a company being audited by the IRS has provided printed paper copies of the electronic reports and records of the accounting system, the IRS agent may still require that the accounting files be submitted.