Field Audit Tests for Sole Proprietor CASH Income Require More Teeth - John R. Dundon II, Enrolled Agent
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Field Audit Tests for Sole Proprietor CASH Income Require More Teeth

Field Audit Tests for Sole Proprietor CASH Income Require More Teeth

This audit was initiated by the Treasury Inspector General for Tax Administration (TIGTA) to determine whether minimum probes for unreported income during sole proprietor audits are conducted in accordance with IRS policies and procedures.  This audit was conducted as part of the Fiscal Year 2010 Annual IRS Audit Plan and addresses the major management challenge of Tax Compliance Initiatives.  Tax gap estimates created after the National Research Program for Tax Year 2001 showed that unreported business income by sole proprietors accounted for $68 billion (20 percent) of the estimated $345 billion gross tax gap.

As called for in IRS policies and procedures, field examiners are generally checking for unreported income during audits of sole proprietors.  However, steps could be taken to increase the consistency and accuracy of preliminary cash transaction analyses.  A preliminary cash transaction analysis provides the basis for performing more indepth audit testing by identifying differences between expenditures and income. If considerable, the differences should be addressed during the audit because it raises questions such as whether there are additional sources of income that should have been reported, if expenses are overstated, or if the taxpayer had a source of non-taxable income.

TIGTA recommended that the Director, Exam Policy, Small Business/Self-Employed Division, issue guidance to group managers to increase the specific written performance feedback given to examiners on the adequacy of their tests for unreported income.  In addition, TIGTA recommended that the Director, Exam Policy, issue guidance to group managers and examiners to reinforce the requirement and importance of using appropriate personal living expense data in preliminary cash transaction analyses.

IRS management agreed with the recommendations and plans to issue a memorandum emphasizing the importance of providing specific evaluative feedback on the adequacy of minimum income probes.  IRS management also plans to issue a memorandum emphasizing the importance of using appropriate personal living expense data in preliminary cash transaction analyses.

To view the report, including the scope, methodology, and full IRS response, go to:

http://www.treas.gov/tigta/auditreports/2010reports/201030105fr.html.

Email Address:   inquiries@tigta.treas.gov

Phone Number:   202-622-6500

Web Site:   http://www.tigta.gov




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