Imagine you are the coach of a football team. It is the week before the championship game, and you are running plays with your team. Just as you are trying to anticipate your opponent’s strategy, their coach posts their championship game playbook on their website. Perhaps, in the world of football, this would be but a mere flight of fancy. But what if you could know while preparing your return what the IRS would look for if it is selected for audit? Does this sound too good to be true? Well, cancel your ticket to fantasy island, as this pipe dream can be your reality!
On the IRS’s website is a list of Audit Technique Guides (or ATGs) that IRS examiners use as a roadmap when auditing various types of income tax returns. Audit Technique Guides are developed internally by the IRS and provide detailed information about specific industries or occupations. They suggest questions auditors should ask a taxpayer about their business, information on typical business practices and recordkeeping, and offer specific audit strategies. It is important to keep in mind that ATGs are to be used as a guideline and they are not law. Auditors are not required to follow the ATG in an audit, and the ATG does not give taxpayers any rights.
Examples of industries for which the IRS has an Audit Technique Guide are the construction businesses, daycare providers, architects, attorneys, ministers, and cosmetologists. People who have businesses in industries where the IRS has published an Audit Technique Guide may want to review the ATG so they understand what the IRS is looking for in an audit. A list of the current guides in publication can be found HERE. Just be warned, the ATGs are not as exciting to read as the latest Stephen King thriller. And due to the IRS’s ever-shrinking budget, many of them have not been updated in many years, so the industry may have changed in drastic ways. Despite being out-of-date, they still provide insight into what the IRS may focus on in an audit.
Audit Technique Guides can also provide a helping hand to those who do not have a business. In addition to industry-specific topics, there are Audit Technique Guides that focus on different tax issues, such as the taxation of lawsuit awards and settlements, including what expenses associated with these awards can be deducted, or what the IRS views as a “hobby” versus an actual business. For those of you who have Airbnb rentals, the IRS has a guide on rental real estate losses called Passive Activity Loss. Unfortunately, there are circumstances where a home foreclosure or cancelation of debt can be taxable. When a person winds up in a money crisis and ends up either losing their home to foreclosure or defaults on a credit card or other type of loan, not understanding the tax problems that may cause can add another layer of stress. After all, the last thing a taxpayer needs is to go through an audit of the debt that was canceled. The Real Estate Property Foreclosure and Cancellation of Debt guide has recently been updated and discusses the gain and loss computations that may need to be done, in addition to what documentation the IRS may request, if a taxpayer’s return with a property foreclosure or cancellation of debt is audited.
For many, the thought of anticipating what the IRS may focus on when auditing their return can be daunting. Thankfully, we can apply the information from the IRS’s “playbook” and hopefully overcome the obstacles that an audit can bring and come out a winner.