Audit Techniques Guides
Article by: Hillary Henderson, M.A. Legal Studies, Paralegal
Audit Techniques Guides (“ATGs”) were developed by the IRS as a first step in what is currently
known as the Market Segment Specialization Program (“MSSP”). 1 This program was developed
to produce highly trained examiners specialized in particular market segments. The guides can
include insight into auditor’s exam techniques, descriptions of common and unique industry issues,
standard business practices, industry terminology, and interview procedures. 2 A market segment
can be an industry such as beauty shops or construction, a profession like attorneys or farmers, or
an issue like executive compensation – fringe benefits. 3
ATGs are particularly useful to tax practitioners because they provide a strong foundation when
advising clients of audit risk because they point out common areas for mistakes, provide a brief
but inclusive overview about typical business practices within a market segment, and are
perpetually being updated and changed. This article will discuss these reasons and also provide a
quick overview of the ATG for cash intensive businesses, which is one of the most widely used
ATGs. 4
ATGs provide a quick but functional overview of typical business practices in an industry. This
allows a practitioner to find out where people in a client’s industry make mistakes that affect their
taxes. Common mistakes include keeping incomplete or unreliable books, records, or supplier
lists; housing off-book inventory; using unorthodox methods of conducting business; and
commingling business and personal funds. 5
It also makes them a good indicator of the level of expertise that an auditor will bring to the table
during an audit of a particular market segment. In essence, an ATG is a guide to common trouble
spots. It will show exactly what the auditor knows and is looking for, which allows for more
thorough preparation on the part of the tax practitioner. Today’s audits are much more targeted
than the old-school “fishing expeditions” that used to be commonplace practice during audits. 6
The development of new and existing ATGs is a perpetual program for the IRS. The guides are
constantly being developed, retired, revised, and updated. In general, ATGs are consistently the
most up to date, reliable and accurate source for tax practitioners regarding IRS audit practices.
1
Stephen Froiken, What the IRS Knows About Your Business, Chicago Tribune,
http://www.chicagotribune.com/business/chi-adviser-irs-story.html.
2
Hidden Resources: IRS Audit Technique Guides, Tax Litigator.me, http://taxlitigator.me/2014/08/12/hiddenresources-irs-audit-techniques-guides/.
3
Market Segment Specialization Program Audit Technique Guides, Tax Almanac.org,
http://www.taxalmanac.org/index.php/Market_Segment_Specialization_Program_Audit_Technique_Guides.html.
4
Supra Note 1.
5
Supra Note 2.
6
Supra Note 1.
11211 Taylor Draper Ln, Suite 300, Austin, TX 78759
(512) 833-5829 | Fax: (877) 335-0545
Email: support@fivestonetax.com
| fivestonetax.com
Licensed and regulated by Texas Department of Licensing & Regulation
The ATG for cash intensive businesses is one of the most widely used because the IRS specifically
targets these businesses due to cash payments being anonymous. Cash intensive businesses
include such industries as restaurants, retail stores, liquor stores, and vending machine operators. 7
The ATG points out several red flags that could trigger an audit: a lifestyle or cost of living that
can’t be supported by the income reported; a business that continues to operate despite year after
year losses, with no apparent solution to correct the situation; unusually low annual sales compared
to the industry average; and a significant difference between the individual business’s gross profit
margin and the industry average. 8
Cash-intensive businesses are also targeted by the IRS because of a high potential for money
laundering. The regulation of money laundering has recently become a joint effort between the
IRS and the Financial Crimes Enforcement Network (“FinCEN”). These two organizations have
recently released the MSB Bank Secrecy Act / Anti-Money Laundering Examination Manual
(“MSB BSA/AML Examination Manual”). 9 This publication is, in essence, an ATG regarding
money laundering.
The MSB BSA/AML Examination Manual emphasizes a legitimate business’s responsibility to
establish and implement preventative policies, procedures, and processes in order to safeguard its
operations from illegal practices such as money laundering. The IRS is taking its anti-money
laundering efforts very seriously. 10 Investigations by Bank Secrecy Act (“BSA”) fraud
investigators can include action ranging from document requests and cash sale statistics to
competitor information, bank statements, and in-person interviews. A practitioner should
approach an IRS examination into a client’s cash-intensive business with thorough preparation,
caution, and a goal of short term resolution. 11
Selected ATGs are available at the IRS website. 12
7
Bank Secrecy Act Anti Money Laundering Examination Manual, Cash-Intensive Business – Overview, Federal
Financial Institutions Examination Council, https://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_099.htm.
8
IRS Audit Survival Guide (Part 2), Creating an Audit Survival Plan for IRS or Sales Tax Audits, US Tax Aid,
http://ustaxaid.com/wp-content/uploads/2010/07/06-25-10_Audit_Survival_Part2_Handout.pdf.
9
FinCEN and IRS Release MSB BSA/AML Examination Manual, Money Transmitter Regulators Association,
http://www.mtraweb.org/fincen-and-irs-release-msb-bsaaml-examination-manual/.
10
Id.
11
The IRS Targets Jeweleers for Compliance with Anti-Money Laundering Rules, Forbes,
http://www.forbes.com/sites/irswatch/2011/03/21/the-irs-targets-jewelers-for-compliance-with-anti-moneylaundering-rules/.
12
Audit Techniques Guides, IRS Website, http://www.irs.gov/Businesses/Small-Businesses-&-SelfEmployed/Audit-Techniques-Guides-ATGs.
11211 Taylor Draper Ln, Suite 300, Austin, TX 78759
(512) 833-5829 | Fax: (877) 335-0545
Email: support@fivestonetax.com
| fivestonetax.com
Licensed and regulated by Texas Department of Licensing & Regulation