Tips on Understanding the Mindset of IRS Auditors



An IRS audit is enough to make you tense with cold sweat in the palms of your hands. More businesspeople have complained to me about the mean-spirited treatment at the hands of IRS agents than any other federal agency.

Worse, the agents’ frequent lack of common sense is shocking.

True, the IRS has over-officious, mean-spirited representatives. Believe it or not, the IRS Web site has comprehensive information that will help you to stay calm in dealing with the agency.

ID-10088767 stockimagesAll taxpayers have reasons to be suspicious of the agency.

That’s in the wake of the IRS scandal in which agency employees politically targeted conservative-leaning nonprofits when they applied for nonprofit status.

This should worry any thinking citizen.

That said, the agency does have level-head, reasonable employees — especially at the lower levels.

So, understand that the IRS isn’t a 100 percent, overbearing bureaucracy.

It helps to anticipate the aspects of your return that serve as catalysts for an audit.

You can stay practically stress-free and prepare for a reasonable dialogue – if you know what IRS agents want.

Seven tips to understand the mindset of IRS auditors:

1. They first judge on appearances. Make sure you look like a business. Organize your records so that they’re ready to be inspected. That means computer software and reconciled bank accounts.

2. Be able to accurately analyze your firm’s revenue and to present it if necessitated by an audit.

3. If you don’t have adequate internal controls, IRS agents will get suspicious. Many will get hard-nosed about your records, and expand their audit. Not only will they scrutinize every single minute detail of your return, but IRS agents are known to expand the audit to other years.

4. If you have benefited from bartering or trading products or services, know that the IRS wants to know about it because it’s considered income. Yes, even if you put something out to get something in return. Agents will stop at nothing – they’ll look high and low for evidence of your participation in a bartering club. So specify your bartering at fair market value.

5. Beware of how you assign income. Auditors look for evidence that taxpayers assign income to other businesses – to avoid paying taxes or to show a net operating loss. If you do assign income to another party, be prepared to show that entity’s tax returns.

6. Separate your business from personal records, and keep a record of your revenue and expenses. IRS agents will tally all your bank deposits and compare them to your sales. So keep careful records on whether you make personal deposits to aid your business for positive cash flow or a financial gift from relatives.

7. Keep computer records with copies of cancelled checks in all non-taxable income items that are deposited in your bank account. This should allay any IRS suspicions.

From the Coach’s Corner, here are more financial tips:

4 Strategies if You Fear Missing Year-End Forecasts How to strategically manage a financial crisis   Are you sweating over cash flow? Are you losing sleep over the prospect of missing your annual goals? Well, if so, certainly you’re not alone. Many business owners and executives have suffered from the same anxiety. But fear can be a great motivator for success.

Primer for Best Practices in Preparing Financial Statements –A good financial system is vital for your business. Not only will a properly prepared financial statement tell you what’s transpired in your business, it will give you a snapshot regarding your future.  Measurement of cash flow is paramount.

Checklist to Increase Your Startup’s Cash Flowre growing quickly, cash flow is paramount. There are at least 11 ways you can increase cash flow for your business to function properly.

Do You Know What Drives Your Profit? (There Are 4 Drivers) — For profits, entrepreneurs must learn how to manage their financials and performance, which are difficult tasks. Savvy business owners know who their ideal clients or customers are. Entrepreneurs realize financial benefits when their revenue from business exceeds their expenses and taxes. This results in a much easier task.

Accounting / Finance – Why and How to Determine Your Break-Even Point —  Uncertainty can kill hope in business. Best practices in management mean having the right information to alleviate uncertainty in business. For that you need the right tools. One important tool – know your break-even point (BEP). A BEP analysis should be an integral part of your financial planning.

“We’ll try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail.”

-Dave Barry


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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.





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Seattle business consultant Terry Corbell provides high-performance management services and strategies.