NEVER AGAIN FEAR AN IRS TAX AUDIT! The IRS MANUAL written specifically for Internal Revenue Service Audit Agents to use while conducting audits of taxpayers in the Computers, Electronics and other High-Tech Industries.
The Internal Revenue Service Identifies A Case With Ideal Audit Potential!
This is the exact information provided to Auditors by the Internal Revenue Service to help them determine if a taxpayer is ripe for "adjustments" - By the way..."adjustments" means tax dollars - YOUR tax dollars!
All cost of sales examinations should begin with identification and reconciliation of Schedule M-1 cost of sales and inventory accounts to the corresponding general ledger or trial balance. This analysis may reveal the major inventory accounts you may wish to examine further and clue you to possible issues related to nonstandard journal entries or reserve accounts.
At this point, care must be taken in deciding to proceed with and in-depth audit plan for cost of sales, as even a significant adjustment to ending inventory produces subsequent year inventory debits. A compliance decision must, therefore, be considered with focus of materiality. This study revealed specific non-compliant areas, which indicate audit potential.
- Utilization of the Gross Profit Method for inventory valuation. This method is specifically not allowed. See change in Accounting Methods, IRC Section 481(a). Or, utilization of the Cash Basis method of accounting
- No Physical Inventory Counts Taken (IRC Section 471)
- Failure To Inventory Overhead Cost, Direct Labor, or Both
- Failure To Implement IRC Section 263A (File F3115). If The taxpayer properly elected the change, an IRC Section 481(a) adjustment should be present of Schedule M-1 through the past 10 taxable years.
