Publication Date - July 2006

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

Table of Contents / Chapter 2
Tax Code, Regulations and Official Guidance Search

Chapter One - The Audit Flow

• Purpose of Guide
• The Information Document Request
• The Pre-Audit
• The Initial Interview
• The Audit

Purpose of Guide

This guide has been written to provide you with a general understanding of the farming operation. It is important to have an understanding of the various facets of a farm operation in order to adapt auditing techniques to different situations. Agriculture continues to be the major industry in many states.

CAUTION: Agriculture is subject to both economic and weather fluxuations. Production and yield differences may exist between different areas of the country or even within a state. Examiners need to be conscious of these elements that may affect the examination.

Compliance Potential
There are several reasons why farming might lend itself to underreporting income. Some of these reasons are:

1. Most income is received from non-information return sources.
2. Crops are not sold on a daily basis.
3. Books  may be very elementary (e.g., a single entry system).
4. There may be a lack of internal control since the farmer is responsible for receiving, recording and depositing all income.
5. There may be no internal controls to test income.

Example

A farmer received, recorded and deposited all his income. The money received was deposited into two different bank accounts. The farmer showed one of the accounts to the agent and everything checked out. He failed to mention the other account. The agent looked at bank deposit statements, grower year end statements and traced the income. She discovered another account which had almost $700,000 in it. The taxpayer’s response was he received this income and deposited the income to the other account. He would only withdraw money from this account as needed, and at that time, he would report the money as taxable. This was the taxpayer’s way of deferring his income. Income is reportable as received per IRC § 61. The agent made the adjustment and collected the tax due.

General information has been provided in the following pages that may be useful in your examinations.