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Minimize IRS Audit Pain

This article is written by Ben Rucker, a former special IRS auditor.  The video, of course, is of Lee Phillips.

Item #16 on Lee’s formalities checklist allows you to minimize the pain of an IRS audit: “Are you sure that your tax returns, books of account, and company records all say the same thing?”  This is a huge key in getting ready for tax season.

As an Internal Revenue Agent with the IRS, one of the examination techniques I used was to reconcile the books to the return. In fact, here are the audit techniques that IRS Agents are taught:

  1. Reconcile the profit or loss (P&L) shown on the return to the taxpayer’s books.
  2. Compare prior and subsequent years P&L statements. Identify significant changes and adjust the scope/depth of the examination as needed.
  3. Review the adjusted trial balance, including the adjusting entries and explanations.
  4. Compare the current year’s trial balance to the prior and subsequent year’s balance. Note significant variations for further inquiry.
  5. Review the adjusting journal entries. Analyze the adjusting journal entries to verify the corrections or reclassifications are proper. Confirm the taxpayer’s explanations depict the true effect of the adjustments.

Properly kept books and records help limit the scope of the examination and give the examiner confidence in the accuracy of your return.

If and when you are audited, the IRS will take the books and records of your business and sample the receipts. If you are able to find the receipts and documents that they request right away in the first sampling, it can limit the scope of the audit.  The auditor will feel he or she has credibility in reviewing your records without having to go through every entry on every page.  (More on this at This means the audit will take less time away from you and your work, and require less paid time on the part of your accountant.

Keeping adequate books and records is required by law. Regs. Sec. 1.6001-1 requires that all persons filing income tax returns must keep books of account or records (including inventories) to sufficiently establish gross income, deductions, credits and other matters shown on the return and making them available for inspection by the IRS.

Most importantly, a successful business always keeps timely and accurate books and records which are used to make key business decisions regarding the profitability of the entity.

There is an entire section on avoiding and minimizing the impact of audits in Ben and Lee’s course Advanced Tax Tactics.

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