What Types of Businesses Are Specifically Targets by the IRS’s Audit Team?

Some taxpayers are interested to know what businesses the IRS specifically targets. While all businesses are fair game for an audit, IRS audit guides and manuals tend to focus gas stations, new and used car dealerships, and companies and individuals engaged in direct Internet sales. While these industries may seem quite different, there are certain common factors that attract the attention of the IRS.

Cash Intensive Businesses Attract Additional Scrutiny

When businesses deal in cash, the IRS recognizes that the chances of fraud are greater than normal. This is due to the fact that many business owners incorrectly believe that cash is untraceable and furthermore that auditors will be unable to reconstruct their financial transactions. However, even when business owners at car dealerships, retail stores, or gas stations pay employees in cash or utilize check cashing services to convert income into cash, auditors can follow the trail.

Car Dealerships Attract Tax Scrutiny Due to Questions Regarding Basis

At both new and used auto dealerships, it is extremely common practice to offer potential customers the ability to trade-in their vehicle as part of the transaction. When a dealership takes ownership of a used car or truck, for tax purposes,  that vehicle is considered property. In general, when the property is disposed of, capital gain or capital loss must be accounted for. Since car dealerships are in the business of making money, they typically account for capital gains. However, dealerships may understate the basis of the property and thus understate the capital gains tax due. While other issues can certainly exist, questions regarding basis often predominate.

Electronic Record Keeping is Also a Source of Concern

While online businesses are the most likely to keep electronic financial and business records, the IRS is concerned about any business using electronic records or point of sale systems. This is because electronic systems make it trivial to change records. In fact, Zappers – software devices that allow business owners to modify receipts have long been a focus of the IRS and California tax enforcement agencies.