Audit Techniques Guides are available here in Adobe PDF, or as Web pages, or both. The PDF versions must be viewed with the Acrobat Reader.

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Audit Techniques Guides (ATGs)

These Audit Techniques Guides (ATGs) help IRS examiners during audits by providing insight into issues and accounting methods

unique to specific industries. While ATGs are designed to provide guidance for IRS employees, they’re also useful to small business

owners and tax professionals who prepare returns.

ATGs explain industry-specific examination techniques and include common, as well as, unique industry issues, business practices

and terminology. Guidance is also provided on the examination of income, interview techniques and evaluation of evidence. So they

may be helpful for business and tax planning purposes. To find out more about how these guides may be helpful to you, watch this

short video.

Audit Techniques Guides are available here in Adobe PDF, or as Web pages, or both. The PDF versions must be viewed with the

Acrobat Reader.

NOTE: These guides are current through the publication date. Since changes may have occurred after the publication date that

would affect the accuracy of these documents, no guarantees are made concerning the technical accuracy after the publication

date.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Aerospace Industry

Publication Date: 01/2005

The Service has prepared a comprehensive audit techniques guide to assist examiners in evaluating research credit in the

aerospace industry. The guide focuses on the particular unique aspects of the industry and provides examiners tools and tests to

utilize in evaluating and auditing research credit.

Air Transportation (PDF - 1.85MB)

Publication Date: 04/2008

Overview of excise tax paid for transportation of persons or property by air.

Architects and Landscape Architects (PDF - 378.27KB)

Publication Date: 08/2011

This audit technique guide (ATG) has been developed to provide guidance to taxpayers as well as to revenue agents and tax

compliance officers conducting examinations in the architect and landscape architect service industries.

Art Galleries - Audit Technique Guide (PDF - 461KB)

Publication Date: 01/2012

This Audit Technique Guide (ATG) has been developed to provide guidance to taxpayers as well as to revenue agents and tax

compliance officers conducting examinations of Art Galleries.

Attorneys Audit Technique Guide (PDF - 525.34KB)

Publication Date: 03/2011

The Attorneys Audit Techniques Guide is intended to provide guidance to the examiner who is auditing a taxpayer who is an

attorney or an attorney firm and to provide tax related guidance to taxpayers and other professionals in this industry.

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Business Consultants (PDF - 700KB)

Publication Date: 07/2011

The Business Consultants ATG now includes an income section that addresses the shifting or the assignment of income issue and

the substance versus form issue an examiner may encounter when conducting an examination.

Capitalization v Repairs

Publication Date: 11/2010

The ATG provides techniques for reviewing and examining capitalization v repairs issues.

Cash Intensive Businesses

Publication Date: 04/2010

Businesses that have substantial cash transactions are included in the consolidated Cash Intensive Businesses Audit Techniques

Guide. Some of these businesses include bail bonds, beauty shops, car washes, check cashing establishments, coin operated

amusements, laundromats, scrap metal, some convenience stores and Taxicabs. Guidance is also provided on examination of

income, interview techniques, and evaluation of evidence.

Child Care Provider (PDF - 220KB)

Publication Date: 3/30/2009

This Audit Techniques Guide will provide information on tax related issues pertaining to the child care providers industry. It provides

guidance on accounting for income and deductions. Intended audiences are taxpayers, tax professionals and IRS examiners.

Coal Excise Tax (PDF - 471KB)

Publication Date: 05/2005

Provides excise tax agents with specific tools to examine issues relating to domestically produced coal.

Commercial Banking (PDF - 857KB)

Publication Date: 05/2001

Overview of the industry. Discusses potential issues and terminology unique to banking.

Conservation Easement (PDF - 926KB)

Publication Date: 11/2011

Audit Techniques Guide providing guidance on charitable contributions of conservation easements.

Construction Industry (PDF - 2.6MB)

Publication Date: 05/2009

Overview of the industry including a glossary. Discusses types of contracts; types of contractors; methods of accounting; and joint

ventures. This updated guide includes the filing locations for Rev. Proc. 92-29 elections (Chpt 7); includes contractor square footage

costs (Chpt. 11); and common errors in look-back interest filings (Chpt. 5). See also Examination and Closing Procedures Form

8697, Look-Back Interest, Publication Date: 05/2007, for general information regarding the application of Form 8697, Interest

Computation Under the Look-Back Method for Completed Long-Term Contracts.

Continuation of Employee Healthcare Coverage (PDF - 360KB)

Publication Date: 03/2012

This audit techniques guide was developed to provide guidance to IRS employees and taxpayers concerning the Consolidated

Omnibus Budget Reconciliation Act of 1985.

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Cost Segregation

Publication Date: 01/14/2005

The Service has prepared a comprehensive audit techniques guide to assist examiners in evaluating cost segregation studies

submitted by taxpayers in support of depreciation deductions. The guide is also beneficial for taxpayers and practitioners in

preparing these studies.

Credit for Increasing Research Activities (i.e. Research Tax Credit) IRC § 41 (PDF -116KB)

Publication Date: 06/2005

This audit techniques guide sets forth the Research Credit Technical Advisors’ suggested guidelines for auditing research credit

issues.

Excise Tax on Indoor Tanning Services (PDF - 469KB)

Publication Date: 07/2012

The Excise Tax on Indoor Tanning Services Audit Techniques Guide provides an overview of the indoor tanning tax and

examination direction. Intended audiences are taxpayers, tax professionals and IRS examiners.

Executive Compensation - Fringe Benefits

Publication Date: 02/04/2005

Corporate executives often receive extraordinary fringe benefits that are not provided to other corporate employees. Any property or

service that an executive receives in lieu of or in addition to regular taxable wages is a fringe benefit that may be subject to taxation.

Factoring of Receivables (PDF - 32KB)

Publication Date: 06/2006

This audit techniques guide focuses on a strategy in which multinational corporations use factoring of accounts receivable among

related parties to avoid U.S. taxation by shifting income offshore and reducing U.S. income by deducting expenses related to the

same income.

Farmers

Publication Date: 07/2006

The Farmers Audit Techniques Guide (ATG) focuses on developing highly trained examiners for the agricultural market segment.

The Guide contain examination techniques, common and unique industry issues, business practices, industry terminology and other

information to assist examiners in performing examinations. Some agricultural guides covered include cotton, raisin grapes, general

livestock, livestock marketing/auction barns, grain, and tobacco.

Fishing Audit Technique Guide (PDF - 851KB)

Publication Date: 08/2011

This guide provides technical information and audit techniques for common issues in the fishing industry. The intended audience is

fishermen, tax professionals and IRS examiners.

Foreign Insurance (PDF - 434KB)

Publication Date: 04/2008

This audit techniques guide was designed to assist the examiner in conducting audits where Excise Tax of Foreign Insurance

transactions may be due.

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Golden Parachute

Publication Date: 02/04/2005

The Service has prepared a comprehensive audit techniques guide to assist examiners in evaluating parachute examinations. The

parachute examination can occur during the examination of either the corporation's or the individual's return.

Hardwood Timber Industry (PDF - 366KB)

Publication Date: 2/1998

Provides general and technical information useful to examiners in classifying, preplanning and examining returns relating to this

industry.

IC-DISC Audit Guide

Publication Date: 03/2012

This IC-DISC Audit Guide is intended to provide guidance to examiners who are auditing a Form 1120 IC-DISC and/or its related

shareholder(s).

Inland Waterways (PDF - 607KB)

Publication Date: 12/2008

This audit techniques guide is intended to provide assistance to the examiner who is auditing a taxpayer for which the use of the

Inland Waterways is an issue.

IRC 162(m) Salary Deduction Limitation

Publication Date: 02/04/2005

Every publicly held corporation maintains its executive compensation records differently. Likewise, every publicly held corporation

maintains different methods for compensating its executives. As the examining agent, you must first learn the identity of the

individual(s) within the corporation who are most familiar with how the executive compensation records are maintained.

IRC § 183: Activities Not Engaged in For Profit (PDF - 723KB)

Publication Date: 06/19/2009

This audit techniques guide (ATG) has been developed to provide guidance to Revenue Agents and Tax Compliance Officers in

pursuing the application of IRC § 183, Activities Not Engaged in for Profit (sometimes referred to as the "hobby loss rule").

Lawsuits, Awards, and Settlements (PDF - 568 KB)

Publication Date: 05/2011

This guide focuses on taxability of lawsuits, awards and settlements.

Low-Income Housing Credit - Guide for Completing Form 8823 (PDF - 841 KB)

Publication Date: 01/2011

IRC 42, The Low-Income Housing Credit (LIHC) Program, is co-administered by the IRS and state housing credit agencies. As part

of their administrative responsibilities, the agencies monitor the housing project for compliance with IRC 42 requirements and report

any observed noncompliance to the IRS using Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or

Building Disposition. This ATG provides state agencies with guidelines for evaluating taxpayer compliance and reporting

noncompliance to the IRS.

Ministers (PDF - 243KB)

Publication Date: 04/23/2009

The Ministers Audit Techniques Guide is intended to provide guidance to the examiner who is auditing a taxpayer who is a minister

and to provide tax related guidance to taxpayers and other professionals in this industry.

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New Markets Tax Credit (PDF - 208KB)

Publication Date: 05/2010

The New Markets Tax Credit (NMTC) Program, enacted by Congress as part of the Community Renewal Tax Relief Act of 2000, is

incorporated as section 45D of the Internal Revenue Code. This Code section permits individual and corporate taxpayers to receive

a credit against federal income taxes for making Qualified Equity Investments (QEIs) in qualified community development entities

(CDEs).

New Vehicle Dealership (PDF - 1.99 MB)

Publication Date: 1/2005

This guide will give you the key to a quick and competent closure of any new vehicle dealership examination which hinges on

narrowing the scope of the examination to items that may prove productive.

Non-Qualified Deferred Compensation

Publication Date: 02/04/2005

The Service has prepared a comprehensive audit techniques guide to assist examiners in evaluating non-qualified deferred

compensation. A nonqualified deferred compensation (NQDC) plan is any elective or nonelective plan, agreement, method, or

arrangement between an employer and an employee (or service recipient and service provider) to pay the employee compensation

some time in the future.

Obligations Not in Registered Form (PDF - 275KB)

Publication Date: 6/2006

Obligations Not in Registered Form

Obligations Not in Registered Form D (PDF - 84KB)

Publication Date: 06/2006

Obligations Not in Registered Form D

Oil and Gas Industry (PDF - 494KB)

Publication Date: 5/1996

Provides information on basic operations and common terminology. Includes reference to royalty owners and an introduction to

financial products.

Ozone Depleting Chemicals (PDF - 412KB)

Publication Date: 9/2007

This is the audit techniques guide for Ozone Depleting Chemicals (ODC).

Partnerships

Publication Date: See Table of Contents for Publication/Revision Date of the Individual Chapters

The focus is on issues that fall within sections 701 through 761 of the Code (Subchapter K). Subchapter K deals primarily with the

formation, operation, and termination of partnerships. Many issues arise during the initial or final year of the partnership.

Passive Activity Losses (PDF - 3437 KB)

Publication Date: 02/2005

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Placer Mining (PDF - 181KB)

Publication Date: 7/1999

Provides guidelines for the examination of taxpayers in this industry. Focuses on small mining operations represented as sole

proprietorships on Schedule C, but can be adapted for partnership and corporate returns.

The Port Project (PDF - 282KB)

Publication Date: 8/1995

Provides examiners assistance in auditing industries related to coastal and inland waterways.

Reforestation Industry (PDF - 120KB)

Publication Date: 8/1995

Overview of the industry. Discusses some issues that may be encountered - including employment taxes; poor accounting records;

etc.

Rehabilitation Tax Credit (PDF - 353KB)

Publication Date: 12/2002

Provides examiners with audit aids (i.e. issue checksheet, pro forma Information Document Request, and standardized audit

reports, etc.) which assist in identifying and addressing common rehab tax credit issues.

Research Credit Claims: Credit for Increasing Research Activities § 41

Publication Date: See table of contents for publication/revision date for the individual chapters, exhibits, and letters & forms. This

guide provides guidance on the handling and evaluation of research credit claims.

Retail Industry (PDF 785KB)

Publication Date: 2/2009

Overview of the Retail Industry.

Sections 48A and 48B - Advanced Coal and Gasification Project Credits

Publication Date: 5/2009

Section 46 provides that the amount of investment credit for purposes of § 38 for any taxable year is the sum of the credits listed in

§ 46. Section 1307(a) of the Energy Tax Incentives Act of 2005, Pub. L. 109-58, 119 Stat. 594 (August 8, 2005), amended § 46 to

add two new credits to that list: The qualifying advanced coal project credit, (section 48A) and the qualifying gasification project

credit, (section 48B).

Split Dollar Life Insurance

Publication Date: 03/07/2005

Split-dollar life insurance arrangements can be a key feature of executive compensation packages. Over the years, the Service has

provided limited guidance regarding the taxation of these arrangements. Beginning in 2001, transitional guidance on the valuation of

split-dollar life insurance arrangements was provided in the form of notices and proposed regulations in anticipation of final

regulations.

Stock Based Compensation

Publication Date: 02/04/2005

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Stock-based compensation generally consists of either the transferring of stock or the issuance of stock options to an employee or

independent contractor.

Structured Settlement Factoring (PDF - 282KB)

Publication Date: 11/2006

Structured Settlement Factoring

Timber Casualty Loss (PDF - 611KB)

Publication Date: 04/2011

The purpose of this Audit Technique Guide is to provide guidance on conducting income tax examinations with a Timber Casualty

Loss.

Veterinary Medicine (PDF - 495KB)

Publication Date: 4/2005

Overview of industry includes discussion of types of business entities (especially personal service corporation); cash vs. accrual

method of accounting; and inventory vs. supplies.

Wine Industry ATG (PDF - 354KB)

Publication Date: 05/2011

The Wine Industry Audit Technique Guide is designed to assist examiners in their compliance reviews of both winery and vineyard

operations.

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Page Last Reviewed or Updated: 2012-08-03

Revenue Agent Reports (RARs)

Revenue Agent Reports (RARs) should contain all the information necessary to ensure a clear

understanding of the adjustments and demonstrate how the tax liability was computed. Based upon

the importance of the RAR, examiners should take all necessary steps to ensure report accuracy.

Workpapers are the written records kept by the examiner that provide the principal support for the

RAR and document the procedures applied, tests performed, information obtained, and the

conclusions reached in the examination. They should include all the information necessary to

conduct the examination and support the audit results.

A regular agreed report ( Form 4549) may contain up to three tax years. Agreed RARs require the

taxpayer’s signature and include a statement that the report issubject to the acceptance of the Area

Director, Area Manager, Specialty Tax Program Chief, or Director of Field Operations.

Generally, the report forms for unagreed cases are identical to the report forms for agreed cases.

Some exceptions include examinations involving non-taxable returns. All unagreed cases require

written comment regarding:

• the Team Manager’s involvement in the examination

• the validity of the issues involved, and

• a statement that a closing conference was or was not held with the taxpayer.

Form 886-A is the written explanation of adjustments in all unagreed cases. If an adjustment

involves a detailed computation, a worksheet will be attached. The following format is used when

preparing Form 886-A:

a) Facts, e.g., the activity or non-activity the organization or plan has engaged in or started

b) Law – states the applicable code and regulation sections, and Rev. Rulings, Revenue

Procedures, etc., that support the position

c) Government’s Position – states why the application of the law to the facts supports the conclusion

reached by the specialist

d) Taxpayer’s Position – what authority the taxpayer is relying upon (as opposed to the agent’s

conclusions). If possible, the taxpayer’s position should be secured in writing

e) Conclusion – comments on the position taken by the taxpayer. After consideration of all items, the

proper tax liability or other Service action is to be sustained

Basic report forms in unagreed cases are designed to cover three years. Regardless of the number

of years examined.

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Internal Revenue Manual (IRM)

Part 1 Organization, Finance and Management

Part 2 Information Technology

Part 3 Submission Processing

Part 4 Examining Process

Part 5 Collecting Process

Part 6 Human Resources Management

Part 7 Rulings and Agreements

Part 8 Appeals

Part 9 Criminal Investigation

Part

10 Security, Privacy and Assurance

Part

11 Communications and Liaison

Part

13 Taxpayer Advocate Service

Part

20 Penalty and Interest

Part

21 Customer Account Services

Part

22 Taxpayer Education and Assistance

Part

25 Special Topics

Part

30 Administrative

Part

31 Guiding Principles

Part

32 Published Guidance and Other Guidance to Taxpayers

Part

33 Legal Advice

Part

34 Litigation in District Court, Bankruptcy Court, Court of Federal Claims,

and State Court

Part

35 Tax Court Litigation

Part

36 Appellate Litigation and Actions on Decision

Part

37 Disclosure

Part

38 Criminal Tax

Part

39 General Legal Services

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IRM

Part 4. Examining Process

• 4.10 Examination of Returns

o

4.10.1 Overview and Basic Examiner Responsibilities

o

4.10.2 Pre-contact Responsibilities

o

4.10.3 Examination Techniques

o

4.10.4 Examination of Income

o

4.10.5 Required Filing Checks

o

4.10.6 Penalty Considerations

o

4.10.7 Issue Resolution

o

4.10.8 Report Writing

o

4.10.9 Workpapers

o

4.10.10 Standard Paragraphs and Explanation of Adjustments

o

4.10.12 Frivolous Return Program

o

4.10.13 Certain Technical Issues

o

4.10.15 Report Generation Software

o

4.10.16 Examination Operational Automation Database (EOAD)

o

4.10.20 Requesting Audit, Tax Accrual, or Tax Reconciliation Workpapers

o

4.10.21 U.S. Withholding Agent Examinations - Form 1042

o

4.10.26 Net Rate Netting Procedures for LB&I Cases

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4.10.4.3.7.5 (08-09-2011)

Evaluating Electronic Books and Records

1. The Uniform Electronic Transaction Act (UETA) defines electronic records as a record

created, generated, sent, communicated, received, or stored by electronic means. The

UETA is suggested legislation that the National Conference of Commissioners on

Uniform State Laws, in 1999, drafted and recommended be adopted by all states. More

information about the UETA can be found at

http://www.nccusl.org

.

2. Rev. Rul. 71-20, 1971 -1 C.B. 392, establishes that all machine-sensible data media used

for recording, consolidating, and summarizing accounting transactions and records within

a taxpayer's Automatic Data processing (ADP) system are records within the meaning of

IRC 6001 and Treas. Reg. 1.6001-1, and are required to be retained so long as the

contents may become material in the administration of any internal revenue law.

3. Rev. Proc. 98-25, 1998-1 C.B. 689, specifies the basic requirements that the Service

considers essential when a taxpayer maintains records within an ADP.

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Use of Electronic Accounting Software

Records; Frequently Asked Questions and Answers

Here are some frequently asked questions and answers for electronic accounting software records requests and submissions during Small Business/Self-Employed examinations

Q1. Why is the IRS using electronic accounting records instead of continuing to use traditional paper books and records in examinations?

A: Electronic information management has become the standard in the private sector and is now being used to enhance the IRS examination process. Obtaining accounting records in electronic format provides significant advantages:

Reduces burden because taxpayers and/or representatives don’t have to print records provided electronically.

•

Provides a complete set of the taxpayer’s accounting records, decreasing the number of items included in the initial document request and follow-up requests.

•

Increases efficiency of the examiner’s analysis and testing of the books and records. •

Q2. How and when will the IRS request electronic accounting software records?

A: The IRS will request electronic accounting software backup files using Form 4564, Information

Document Request (IDR), early in the examination. IRS will also request the administrator's

username and password, as they are needed to read most data files.

The backup file should be provided on a CD, DVD, or a flash/jump drive. E-mail must not be used to transmit electronic records to or from the IRS, a taxpayer, or their representative, to ensure security. Q3. What is the IRS doing to address concerns about sharing the accounting software administrator's username and password for the audit?

A: The taxpayer can preserve any favorite password by changing the administrator's password to a temporary one, such as "IRS Audit." Create the backup file for submission and then change the password back to the original "favorite" one within the main accounting software working file. The temporary password must have administrator access to the backup file provided because the IRS needs to have the same access levels as the administrator. If the examiner does not have the administrative password, he or she will not be able to read the data as needed for the examination. Q4. What if a taxpayer uses an accounting software program that is not readable by the IRS?

A: At this time, IRS has the ability to accept and read data files from accounting software programs that are used by most business taxpayers. Taxpayers should consult with the examiner before submitting any type of electronic files.

Whenever possible, the IRS will work with the taxpayer and their electronic accounting records to reduce the number of information document requests (IDR's). However if the examiner is unable to read the electronic accounting records, he or she will determine the best course of action to complete the audit in a timely, efficient manner.

Q5. Now that IRS has the ability to accept electronic information from accounting software programs, will backup files be requested in every examination where the taxpayer uses those programs to maintain their books and records?

A: Using electronic records to conduct examinations should make the audit more efficient for everyone. Examiners will be requesting these files in the majority of cases where the taxpayer already uses electronic accounting software to maintain their books and records. However, if the audit is limited in scope, such as auditing one specific expense item, the examiner may determine that requesting the electronic accounting software file may not be necessary. In broader scope audits, such as when verifying gross income, the backup file will likely be requested by the examiner. The professional judgment of the examiner and his or her manager will be used on a case by case basis to determine whether it is appropriate for a particular examination.

Q6. How will the electronic data be used?

A: 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, the examiner can "drill down" to the underlying data and documents to further investigate items, as appropriate.

The software also allows the examiner to test the integrity and veracity of the accounting records in making a determination as to the reliability of the records for examination purposes. However, the examiner may still need to request other documents when such records are necessary to properly test a return item or issue.

Q7. What is the IRS's legal authority for requesting electronic files and other relevant accounting records? How does Revenue Procedure 98-25 impact the IRS' authority to request electronic records from small business taxpayers?

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A: The legal authority for requesting accounting records in electronic format is based on Internal Revenue Code section 7602(a), Internal Revenue Code section 6001, Regulation 1.6001-1(a) and -1 (e) (PDF), Revenue Ruling 71-20 and Revenue Procedure 98-25.

Note that, although Revenue Procedure 98-25 exempts certain taxpayers from the requirements of the Revenue Procedure, this does not create an exemption for any taxpayer from having to produce electronic books and records if they otherwise exist when a business chooses to use an electronic accounting software program to maintain their books and records.

Q8. What if a taxpayer refuses to provide the IRS with an electronic accounting software backup file or any other type of electronic data file?

A: Our tax system is set up in such a way that taxpayers fill out their own tax returns and are responsible for maintaining their own books and records.

Under Internal Revenue Code section 6001 and Regulation 1.6001-1 (PDF), taxpayers are responsible for maintaining sufficient books and records to support the income and deductions claimed on their tax returns and for presenting this information to the IRS when requested to do so in an examination.

Further, section 7602(a)(1) grants the IRS the authority to examine any books, papers, records or other data that may be relevant or material to a tax examination. Section 7602(a)(2) grants the IRS the authority to summons the books and records.

If the taxpayer has concerns with providing a copy of their original accounting software backup file, they have the right to discuss the matter with the examiner's manager.

If a taxpayer declines to submit the requested materials voluntarily, the IRS has the right to summons the information requested, use indirect methods to reconstruct income and/or disallow the items reported for lack of substantiation.

If the taxpayer or the taxpayer's representative has concerns that the records contain sensitive or privileged information, please see Q&As #14 and #15 for guidance.

Q9. What if the taxpayer's representative refuses to provide a copy of the taxpayer's electronic accounting backup file?

A: If the taxpayer's representative chooses to decline to voluntarily submit the requested materials, the IRS has the right to summons the information and the representative could be in violation of Treasury Department Circular No. 230 (PDF).

Subpart B, section 10.20(a)(1), of the Treasury Department Circular No. 230 (PDF) regulations states that "[a] practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged."

If the taxpayer or the taxpayer's representative has concerns that the records contain sensitive or privileged information, please see Q&As #14 and #15 for guidance.

Q10. What if the taxpayer or representative agrees to provide a copy of the taxpayer's company backup file; however, rather than providing an exact copy of the original file they create a new file for the IRS?

A: If the taxpayer or representative creates or reconstructs a new company file, for example, by re-inputting the transactions for only the year under examination, this new file does not satisfy the requirements or needs of the Internal Revenue Service. The new or modified company file is not a copy of the books and records of original entry. The altered electronic file would not meet the requirements of the Information Document Request or a summons and the taxpayer's representative could be in violation of Treasury Department Circular No. 230 (PDF).

If the taxpayer or representative wants to condense old or closed transactions for dates prior to the years under examination, see Q&A #13 for guidance.

Q11. Why should a taxpayer submit an accounting software backup file rather than simply export selected reports to Excel? What are the advantages to using the backup file over Excel?

A: The backup file is an exact copy of the original books of entry and allows the IRS to review and test the integrity of the original electronic records using the software program. This testing cannot adequately be performed on records that have already been converted into Excel spreadsheets. Examiners are required under IRM 4.10.3.4, Evaluating Taxpayer's Internal Controls, and the related subsections, to acquire an understanding of the accounting system for all types of business returns. An integral part of this process is an evaluation of the taxpayer's internal controls. Examiners use the information obtained during this process to determine the appropriate audit techniques to be used during the examination process.

Through tests and analysis of the electronic records in their original format examiners can properly evaluate the accounting system (including internal controls) to consider the reliability of the books and records. This process is not unique to examinations where the electronic accounting records have been requested.

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The control structure of an accounting system is often times dependent on the size and nature of the business. Frequently, smaller businesses are not able to establish sophisticated control and accounting processes. This is unlike larger entities where resources are more likely to be available for systems and processes. An examiner will determine the appropriate method(s) for examination based on the accounting system and control structure of the business.

By reviewing an exact copy of the original backup file, the examiner can view transactions to see the date the transaction was originally created, dates of subsequent changes, what changes were made, and the username of the person who entered or changed the transaction. This type of information is directly relevant to the evaluation of the taxpayer's accounting system and internal controls. If the various reports that are needed for the examination are only provided in spreadsheet format, there is a possibility that certain information, including metadata, could be lost or altered, leaving no reliable audit trail to identify these changes.

Q12. The accounting software backup file can contain transactional data for several years that are outside the scope of the audit. What, if anything, will the IRS do with that information?

A: If IRS is given a backup file that includes data for years not under examination, IRS will not utilize that data during the examination of the current year. If based on the results from the current year examination a decision is made to expand the scope of the examination to prior or subsequent years, the taxpayer will be notified. The records may be utilized after that notification.

However, the examiner may review transactions that occurred in the month prior to and the month after the tax year or the tax periods before and after the ones under examination if the transactions in those timeframes are relevant to the examination. Examiners may also review any transactional data created or changed during the tax year under examination.

For example, if a business under examination uses the accrual accounting basis, then it will be relevant for the IRS to examine transactions for the month prior to and the month after the tax years under examination to test the cut-off of reported income and expenses. The same is true if a taxpayer creates a transaction to record sales during the year under examination, but the actual transaction is dated in a prior or subsequent year, then the examiner can inquire as to why the taxpayer determined the transaction would not properly be recorded in the year under examination. As another example, if the IRS was exploring whether to reconstruct income by an indirect method (e.g., bank deposits or net worth method), then certain information for the tax periods immediately preceding and following the year under audit would clearly be relevant.

An inspection of the tax returns which are prior or subsequent to the tax years under audit does not constitute an examination of books and records. Examiners are expected to inspect such tax returns in all examinations, and to compare them to the tax returns that are under examination.

Q13. May the IRS request electronic accounting records for periods not under examination?

A: IRS examiners may request the electronic accounting software data backup file to include the month prior to and the month after the tax year under examination, thus a fourteen (14) month period.

An examiner who makes this request is often looking for data for the month prior to and the month after the year under examination, in order to ensure a proper cut-off of reported income and expenses for the year under examination. Sometimes the examiner may need to look at other categories of data pertaining to the month prior to and the month after the tax year under the examination, in order to conduct a proper examination of the tax year.

If the fourteen month period is insufficient to establish an accurate cut-off of revenue and expenses, or to verify other items, for the year under examination, the examiner may request a broader period. The IRS must only show that the information requested is potentially relevant to the issues related to the year under examination in order to request the information.

However, if the taxpayer or representative has concerns the examiner’s request for records are not potentially relevant with respect to the tax year(s) and issues under examination, he or she may discuss the matter with the examiner or manager.

For additional guidance, please see Q&A #12 and IRS Chief Counsel Advice No. 201146017. Q14. Can a taxpayer or representative condense or "clean up" the electronic accounting software data file before submission?

A: Many accounting software programs will condense old, closed transactions occurring prior to a manually selected date. For example, the closing of a prior year. Often this is done to reduce the size of the company data file. The process essentially removes the details of those transactions from the data file and replaces them with summary journal entries, allowing monthly financial statements to be created for old years if needed.

The ongoing data file (working file) will no longer have the details of old, closed transactions which occurred prior to the manually selected date. However, during the condensing process, the software creates a backup or archive copy of the company data file and this archive copy provides the original detailed records of each old transaction. If you do not have a complete understanding of your software's condensing feature, please contact your software provider for additional guidance before using it.

Page 3 of 4

Use of Electronic Accounting Software Records; Frequently Asked Questions and Answers

11/26/2012

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Page Last Reviewed or Updated: 2012-11-05

Condensed data is not acceptable for the tax year(s) under audit. However, if you choose, the company data file can be condensed (through the clean up or purge feature) for dates prior to the year(s) under audit, as long as they do not include transactions created or changed for time periods under audit, or for transactions from prior years that have an effect on the years under audit. If the scope of an audit is expanded, the IRS may request another backup file that was created prior to the date the company file was condensed or request a copy of the archive file created during the condensing process.

Q15. Accounting software backup files contain sensitive customer, vendor, or other information. Since it is possible that any release of this vital information would damage a business, what assurance does the IRS provide that this information is secure?

A: The security and privacy of information provided by taxpayers is taken very seriously by IRS. Internal Revenue Code section 6103 prohibits the unauthorized disclosure of information obtained during the course of a tax examination (including any sensitive business information). IRS employees receive annual training on protecting taxpayer information from unauthorized disclosure and are reminded that they could face disciplinary action (up to and including removal) for such disclosures. Also Internal Revenue Code section 7213 provides for criminal penalties for willful violations of section 6103.

In addition to the section 6103 restriction on disclosure, IRS has procedures in place for examiners on how to protect portable electronic media containing any taxpayer sensitive information. Once the IRS no longer has a business need for the portable electronic media, examiners can return the data to the taxpayer or dispose of it following internal procedures for destruction of sensitive portable electronic media. In addition, any copies made of the taxpayer's electronic files on the examiner's computer will be deleted once the case has been completely closed.

Q16. What if the accounting software backup file contains privileged information or information that is protected from disclosure by statute?

A: The issue of privileged communications is the same whether IRS is asking for electronic or paper records. IRM 25.5.5.4.3, Privileged Communications and Summons, provides guidance to examiners when a claim of privileged communication is made. Paragraph (2) of the IRM section states, "[p] rivileged communications cannot be obtained by issuing a summons."

The taxpayer is encouraged to discuss with the examiner if the electronic backup file contains privileged communications or information that is protected from disclosure by statute. The examiner may ask an IRS Counsel attorney for assistance, if a taxpayer claims that records contain privileged communication or that a statute, such as the Health Insurance Portability and Accountability Act (HIPAA), prevents him from complying with a request for the records. Generally, a customer list would not be privileged but there may be unusual circumstances in a particular case that could possibly make the information, when combined with other information, privileged.

Q17. Can IRS obtain health information from a taxpayer or third party when the information is protected from disclosure by regulations under the Health Insurance Portability and Accountability Act (HIPAA)?

A: Yes, IRS may obtain health information that is protected under HIPAA. Chief Counsel Notice 2004-034 (PDF) (dated Sept. 10, 2004), which provides guidance to IRS Chief Counsel employees, contains more information on the effect of HIPAA when IRS requests protected health information from a taxpayer or third party.

References/Related Topics

IRS Memo (Sept. 1, 2011) Guidance on Usage of Electronic Accounting Software Records (PDF) •

IRS Audits •

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(19)

Publication 463

What’s New . . . .

2 Department

of the

_{Reminder . . . .}

₂

Treasury

Travel,

Introduction . . . .

2 Internal

Revenue

Entertainment,

1. Travel

. . . .

3 Service

_{Traveling Away From Home}

_{. . . 3}

Tax Home

. . . 3

Tax Home Different From

Gift, and Car

_{Family Home}

_{. . . .}

₃

Temporary Assignment or Job

. . . 4

What Travel Expenses Are

Expenses

_Deductible?

_{. . . .}

₄

Meals

. . . 5

Travel in the United States

. . . 6

Travel Outside the United

For use in preparing

States

. . . .

7 Luxury Water Travel

. . . 8

2011

Returns

_Conventions

_{. . . 9}

2. Entertainment

. . . .

9 Directly-Related Test

. . . 9

Associated Test

. . . 10

50% Limit

. . . 10

Exceptions to the 50% Limit

. . . 11

What Entertainment Expenses

Are Deductible?

. . . 12

What Entertainment Expenses

Are Not Deductible?

. . . 13

3. Gifts

. . . 13

4. Transportation

. . . 14

Car Expenses

. . . 15

Standard Mileage Rate

. . . 15

Actual Car Expenses

. . . 16

Leasing a Car

. . . 25

Disposition of a Car

. . . 26

5. Recordkeeping

. . . 26

How To Prove Expenses

. . . 26

What Are Adequate

Records?

. . . 26

What If I Have Incomplete

Records?

. . . 28

Separating and Combining

Expenses

. . . 28

How Long To Keep Records

and Receipts

. . . 28

Examples of Records

. . . 29

6. How To Report

. . . 29

Where To Report

. . . 29

Vehicle Provided by Your

Employer

. . . 29

Reimbursements

. . . 29

Accountable Plans

. . . 30

Nonaccountable Plans

. . . 33

Rules for Independent

Contractors and Clients

. . . 33

Completing Forms 2106 and

2106-EZ

. . . 33

Special Rules

. . . 35

Get forms and other information

Illustrated Examples

. . . 35

faster and easier by:

7. How To Get Tax Help

. . . 41

Appendices

. . . 42

Internet

IRS.gov

Index . . . 56

Jan 31, 2012

(20)

• Your expense, other than lodging, is less

If a charge is made for items other than food and

You do not need to write down the elements

than $75.

beverages, the receipt must show that this is the

of every expense on the day of the expense. If

case.

you maintain a log on a weekly basis that

ac-•

You have a transportation expense for

counts for use during the week, the log is

consid-which a receipt is not readily available.

Canceled check.

A canceled check,

to-ered a timely-kept record.

gether with a bill from the payee, ordinarily

es-If you give your employer, client, or customer

Adequate evidence.

Documentary evi-

tablishes the cost. However, a canceled check

an expense account statement, it can also be

dence ordinarily will be considered adequate if it

by itself does not prove a business expense

considered a timely-kept record. This is true if

shows the amount, date, place, and essential

without other evidence to show that it was for a

you copy it from your account book, diary, log,

character of the expense.

business purpose.

statement of expense, trip sheets, or similar

For example, a hotel receipt is enough to

record.

Duplicate information.

You do not have to

support expenses for business travel if it has all

record information in your account book or other

of the following information.

_{Proving business purpose.}

_{You must}

gener-record that duplicates information shown on a

ally provide a written statement of the business

• The name and location of the hotel.

receipt as long as your records and receipts

purpose of an expense. However, the degree of

complement each other in an orderly manner.

• The dates you stayed there.

_{You do not have to record amounts your}

proof varies according to the circumstances in

each case. If the business purpose of an

ex-•

Separate amounts for charges such as

employer pays directly for any ticket or other

pense is clear from the surrounding

circum-lodging, meals, and telephone calls.

travel item. However, if you charge these items

stances, then you do not need to give a written

to your employer, through a credit card or

other-explanation.

A restaurant receipt is enough to prove an

wise, you must keep a record of the amounts

expense for a business meal if it has all of the

you spend.

Example.

If you are a sales representative

following information.

Timely-kept records.

You should record the

who calls on customers on an established sales

• The name and location of the restaurant.

elements of an expense or of a business use at

route, you do not have to give a written

explana-or near the time of the expense explana-or use and

tion of the business purpose for traveling that

• The number of people served.

support it with sufficient documentary evidence.

route. You can satisfy the requirements by

re-•

The date and amount of the expense.

A timely-kept record has more value than a

cording the length of the delivery route once, the

statement prepared later when generally there is

date of each trip at or near the time of the trips,

a lack of accurate recall.

and the total miles you drove the car during the

Table 5-1. How To Prove Certain Business Expenses

IF you have

THEN you must keep records that show details of the following elements . . .

expenses for . .

Amount

Time

Place or

Business Purpose

Description

Business Relationship

Travel

Cost of each separate

Dates you left Destination or area of

Purpose: Business purpose for the expense or the

expense for travel,

and returned

your travel (name of

business benefit gained or expected to be gained.

lodging, and meals.

for each trip

city, town, or other

Incidental expenses may and number

designation).

Relationship: N/A

be totaled in reasonable of days spent

categories such as taxis, on business.

fees and tips, etc.

Entertainment

Cost of each separate

Date of

Name and address or Purpose: Business purpose for the expense or the

expense. Incidental

entertainment. location of place of

business benefit gained or expected to be gained.

expenses such as taxis,

(Also see

entertainment. Type of For entertainment, the nature of the business

telephones, etc., may be Business

entertainment if not

discussion or activity. If the entertainment was directly

totaled on a daily basis.

Purpose.)

otherwise apparent.

before or after a business discussion: the date, place,

(Also see Business

nature, and duration of the business discussion, and

Purpose.)

the identities of the persons who took part in both the

business discussion and the entertainment activity.

Relationship: Occupations or other information (such as

names, titles, or other designations) about the

recipients that shows their business relationship to you.

For entertainment, you must also prove that you or your

employee was present if the entertainment was a

business meal.

Gifts

Cost of the gift.

Date of the

Description of the gift.

gift.

Transportation Cost of each separate

Date of the

Your business

Purpose: Business purpose for the expense.

expense. For car

expense. For destination.

expenses, the cost of the car expenses,

Relationship: N/A

car and any

the date of

improvements, the date

the use of the

you started using it for

car.

business, the mileage for

each business use, and

the total miles for the

year.

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Department of the Treasury

Internal Revenue Service

Introduction . . . .

1 Why Keep Records? . . . .

2 Publication 552

Kinds of Records To Keep . . . .

2 (Rev. January 2011)

Basic Records . . . 3

Cat. No. 15100V

Specific Records . . . 4

How Long To Keep Records . . . .

6 Recordkeeping

How To Get Tax Help . . . .

7 for Individuals

Introduction

This publication discusses why you should keep records,

what kinds of records you should keep, and how long you

should keep them.

You probably already keep records in your daily routine.

This includes keeping receipts for purchases and

record-ing information in your checkbook. Use this publication to

determine if you need to keep additional information in

your records.

Throughout this publication we refer you to other IRS

publications for additional information. See How To Get

Tax Help in the back of this publication for information

about getting publications and forms.

This publication does not discuss the records you

should keep when operating a business. For information

on business records, see Publication 583, Starting a

Busi-ness and Keeping Records.

Comments and suggestions. We welcome your

com-ments about this publication and your suggestions for

future editions.

You can write to us at the following address:

Internal Revenue Service

Individual Forms and Publications Branch

SE:W:CAR:MP:T:I

1111 Constitution Ave. NW, IR-6526

Washington, DC 20224

We respond to many letters by telephone. Therefore, it

would be helpful if you would include your daytime phone

number, including the area code, in your correspondence.

You can email us at *[email protected]. (The asterisk

must be included in the address.) Please put “Publications

Comment” on the subject line. You can also send us

comments from www.irs.gov/formspubs/. Select

“Com-ment on Tax Forms and Publications” under “Information

about.”

Although we cannot respond individually to each

com-ment received, we do appreciate your feedback and will

consider your comments as we revise our tax products.

Get forms and other information

Ordering forms and publications. Visit www.irs.gov/

formspubs/ to download forms and publications, call

faster and easier by:

1-800-829-3676, or write to the address on page 2 and

Internet

IRS.gov

_{receive a response within 10 days after your request is}

received.

(22)

Department of the Treasury

Internal Revenue Service

Introduction . . . .

1 What New Business Owners Need To Know

. . . . .

2 Publication 583

Forms of Business

. . . .

3 (Rev. December 2011)

Identification Numbers

. . . .

3 Cat. No. 15150B

Employer Identification Number (EIN) . . . 4

Payee’s Identification Number . . . 4

Starting a

Tax Year

. . . .

4 Accounting Method

. . . .

5 Business and

Business Taxes

. . . .

5 Income Tax . . . 6

Self-Employment Tax . . . 7

Keeping

Employment Taxes . . . 7

Excise Taxes . . . 8

Records

Depositing Taxes . . . 8

Information Returns

. . . .

8 Penalties

. . . .

9 Business Expenses

. . . .

9 Business Start-Up Costs . . . 9

Depreciation . . . 9

Business Use of Your Home . . . 10

Car and Truck Expenses . . . 10

Recordkeeping

. . . 11

Why Keep Records? . . . 11

Kinds of Records To Keep . . . 11

How Long To Keep Records . . . 15

Sample Record System . . . 15

How to Get More Information

. . . 24

Index . . . 27

Introduction

This publication provides basic federal tax information

for people who are starting a business. It also provides

information on keeping records and illustrates a

record-keeping system.

Throughout this publication we refer to other IRS

publi-cations and forms where you will find more information. In

addition, you may want to contact other government

agen-cies, such as the Small Business Administration (SBA).

See How To Get More Information later.

Comments and suggestions. We welcome your

com-Get forms and other information

ments about this publication and your suggestions for

faster and easier by:

future editions.

Internet

IRS.gov

_{You can write to us at the following address:}

Internal Revenue Service

Business Forms and Publications Branch

SE:W:CAR:MP:T:B

www.irs.gov/efile

1111 Constitution Ave. NW, IR-6526

Washington, DC 20224

(23)

Form

2848

(Rev. March 2012) Department of the Treasury Internal Revenue Service

Power of Attorney

and Declaration of Representative

a

Type or print.

a

See the separate instructions.

OMB No. 1545-0150

For IRS Use Only

Received by: Name Telephone Function

Date

/ /

Part I

Power of Attorney

Caution: A separate Form 2848 should be completed for each taxpayer. Form 2848 will not be honored

for any purpose other than representation before the IRS.

1 Taxpayer information. Taxpayer must sign and date this form on page 2, line 7.

Taxpayer name and address

Taxpayer identification number(s)

Daytime telephone number

Plan number (if applicable)

hereby appoints the following representative(s) as attorney(s)-in-fact:

2 Representative(s) must sign and date this form on page 2, Part II.

Name and address

Check if to be sent notices and communications

CAF No.

PTIN

Telephone No.

Fax No.

Check if new: Address

Telephone No.

Fax No.

Name and address

Check if to be sent notices and communications

CAF No.

PTIN

Telephone No.

Fax No.

Check if new: Address

Telephone No.

Fax No.

Name and address

CAF No.

PTIN

Telephone No.

Fax No.

Check if new: Address

Telephone No.

Fax No.

to represent the taxpayer before the Internal Revenue Service for the following matters:

3 Matters

Description of Matter (Income, Employment, Payroll, Excise, Estate, Gift, Whistleblower,

Practitioner Discipline, PLR, FOIA, Civil Penalty, etc.) (see instructions for line 3)

Tax Form Number

(1040, 941, 720, etc.) (if applicable)

Year(s) or Period(s) (if applicable)

(see instructions for line 3)

4 Specific use not recorded on Centralized Authorization File (CAF). If the power of attorney is for a specific use not recorded on CAF,

check this box. See the instructions for Line 4. Specific Uses Not Recorded on CAF

.

a

5 Acts authorized. Unless otherwise provided below, the representatives generally are authorized to receive and inspect confidential tax

information and to perform any and all acts that I can perform with respect to the tax matters described on line 3, for example, the authority to

sign any agreements, consents, or other documents. The representative(s), however, is (are) not authorized to receive or negotiate any

amounts paid to the client in connection with this representation (including refunds by either electronic means or paper checks). Additionally,

unless the appropriate box(es) below are checked, the representative(s) is (are) not authorized to execute a request for disclosure of tax returns

or return information to a third party, substitute another representative or add additional representatives, or sign certain tax returns.

Disclosure to third parties;

Substitute or add representative(s);

Signing a return;

Other acts authorized:

(see instructions for more information)

Exceptions. An unenrolled return preparer cannot sign any document for a taxpayer and may only represent taxpayers in limited situations.

An enrolled actuary may only represent taxpayers to the extent provided in section 10.3(d) of Treasury Department Circular No. 230 (Circular

230). An enrolled retirement plan agent may only represent taxpayers to the extent provided in section 10.3(e) of Circular 230. A registered tax

return preparer may only represent taxpayers to the extent provided in section 10.3(f) of Circular 230. See the line 5 instructions for restrictions

on tax matters partners. In most cases, the student practitioner’s (level k) authority is limited (for example, they may only practice under the

supervision of another practitioner).

List any specific deletions to the acts otherwise authorized in this power of attorney: