What Do Auditors Look For When Evaluating a Cash-Based Company

July 25, 2012
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Operating a small business that accepts mainly cash can be convenient for owners, but it can also invite more scrutiny from the Internal Revenue Service during tax time. The government has increasingly shored up its resources for auditing high net-worth individuals and businesses to ensure they are in full compliance with federal tax law. Cash-based companies are often a target because the payment structure of these businesses may make it easier to hide income. Companies that are audited can expect IRS representatives to examine several aspects of their operations to prove compliance, according to Fox Business. A pre-audit analysis is generally agents’ first task, which involves looking for clues that point to discrepancies in the owner’s reporting information versus lifestyle. For example, the owner’s address, DMV records and investments are typically examined to indicate potential tax fraud. If reporting information details low business income, but the owner lives in an exclusive neighborhood and drives a top-model vehicle, the IRS may be inclined to examine the case further. During the physical meeting with the IRS agent, there will be a thorough examination of company bookkeeping to explore how sales are recorded and whether bank deposits match. The agent will also take a sample of sales invoices to match against bank deposits, Fox Business adds. There are several other areas that will fall under an agent’s scrutiny, including inventory and vendor invoices as well as inflow and outflow consistency. Lastly, other income sources, such as vending machines, kickbacks and rebates and sub-leases, will be evaluated. Business owners should ensure these additional income resources were declared to avoid potential liability.