Revision Date: April 2010 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. This Audit Techniques Guide (ATG) is presented in several chapters. These chapters can be accessed and then printed by following the links in the Table of Contents below. Chapter 1: Introduction and Overview of the Cash Intensive BusinessPDF Statement of Purpose Introduction and Overview of the Guide Respecting the Taxpayer's Privacy Definition of a Cash Business Using a Cash Register Businesses without a Cash Register Books and Records Chapter 2: Pre-audit and Background Review of the Tax ReturnPDF Pre-Contact Analysis of the Tax Return Review of Internal Sources Access IDRS or MACS Information Tax Attaché (TA) Third Party Contacts: Public Records Check Review of External Sources Comparative Analysis and Ratio Analysis Vertical Analysis and Industry Ratios Comparative Ratios Gross margin (gross profit) percentages Inventory turnover Analysis of ending inventory balances Change in net sales from year to year Change in cost of sales from year to year Other Investigative Sources Access Treasure Enforcement Communication System (TECS) Database—Passenger Activity Query and I-94 database Currency and Banking Retrieval System (CBRS) Immigration Files Loan Application Files Bank Records/Financial Records of Foreign Lender or Donor Asset Locator Databases Interviewing Actual Foreign Lender/Donor Interviewing Other Potential Witnesses Summons U.S. Parent Bank for Records Located in Its Foreign Branch Chapter 3: Initial InterviewPDF Interview the Taxpayer Accounting for Cash Cash on Hand Business History Financial Information Summary of Key Points Importance of Issuing a Summons Authority Time and Place of Examination Chapter 4: Minimum Income ProbesPDF Conducting the Required Minimum Income Probes Financial Status Analysis Interview the Taxpayer Tour the Business Evaluate Internal Controls Reconcile Income to Books Test Gross Receipts Analyze Bank Accounts Using Financial Status Audit Techniques Respecting the Taxpayer's Privacy Chapter 5: Examination TechniquesPDF Examination Techniques for a Cash Business Purchases can Reveal Sales The Role of Money Orders and other Money Transfer Systems Sources Hidden Family Transactions Check Cashing Services Indirect Methods Percentage Markup Method (and Unit Volume Method) Fully Developed Cash T-Account Method Source and Applications of Funds Method Bank Deposit Method Net Worth Method Key Points to Audit of Books and Records Chapter 6: Evaluating EvidencePDF Techniques to Corroborate or Refute Income-Related Items Evaluate the Initial Facts Concerning the Non-Taxable Sources and the Current Status of the Audit Other Considerations Examples of Using Specific Industry Audit Techniques Special Focus Issues Net Operating Loss and Passive Activity Loss Considerations Employment Tax Issues Inadequate Records Proper Development of Cases Fraud Considerations Cash Hoard Chapter 7: Digital CashPDF Definition of digital cash Funding and using digital cash Detecting the use of digital cash Chapter 8: Underground EconomyPDF Definition of the Underground Economy Traits of an Underground Worker Examples of Possible Underground Activities Locating Underground Economy Workers Audit Techniques Chapter 9: Bail BondsPDF Bail Bond Defined State Control Transacting Bail Surety Contracts Subagents Books and Records Terminology Internal Sources of Information Third Party Sources Initial Interview Required Filing Checks Primary Audit Issues and Techniques Gross Income Income from BUF Premium Income Reimbursed Expenses Collateral BUF payment deductions Bond Costs Change in Accounting Method Establishing Fraud Chapter 10: Beauty ShopsPDF (PDF) Beauty Salon Defined Income Salon Income Service Income Method 1-Service Income Formula Example-Service Income Formula Retail Income Method 2-Retail Income Formula Method 3-Retail Income Formula Example-Retail Income Formula Rental Income Method 4-Rental Income Formula Example-Rental Income Formula Employee vs. Independent Contractor Tips Determining a Tip Rate Calculating Unreported Tips Other Audit Considerations Initial Interview and IDR Glossary Chapter 11: Car WashPDF Car Wash Defined Internal Sources of Information External Sources of Information Audit Techniques Income Water Consumption Method Water Consumption Formula Soap/Chemical Consumption Method Soap/Chemical Consumption Formula Expenses Initial Interview and Information Document Request Case Studies Glossary Chapter 12: Check Cashing Locations (Under development) Chapter 13: Coin Operated AmusementsPDF Defined Tour of the Business Depreciation- Coordinated Issue- Gaming Industry Issue Conclusion Facts Law and Analysis Audit Techniques Chapter 14: Convenience Stores, Mini-Marts and BodegasPDF Defined Cash and Internal Controls Self-Consumed Items Inventory Issues Miscellaneous Income Chapter 15: LaundromatsPDF Overview Income Initial Interview and Information Document Request Utility Consumption Analysis Chapter 16: Scrap MetalPDF Introduction Purchasers of Scrap Metal Sellers of Scrap Metal Chapter 17: TaxicabsPDF Taxicab Industry Defined Regulatory Environment of the Taxicab Industry Certification, licensing and permits Taxicab rate schedule Determining the Applicable Rates and Fees Sources of Taxicab Industry Information External sources of information Internal sources of information Primary Audit Issues Books and records Income Expenses Tips Determining tip income Calculating unreported tips via credit card sampling Tips versus finder’s fees Employee VS independent contractor Checking worker classification Audit Techniques Taxicab companies Taxicab owners/operators Taxicab drivers Using the taxi formula (a.k.a. the "cab formula") Taxi formula example Initial Interview and Information Document Request Background Operations Books and records Examining tax returns Glossary of Taxicab Terms Tax Law, Regulations, Court Cases, and Other Authorities Internal Revenue Code: Revenue rulings/procedures Revenue Ruling 87-41, 1987-1 C.B. 296, discussing twenty common-law factors considered in determining whether a worker is an employee or independent contractor. Court cases Publications
