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September 17, 2021

Using ATGs to Understand What IRS Auditors Look For in Your Industry

IRS auditors

IRS examiners typically prepare for business audits by researching the specific industries and issues that relate to the taxpayer’s return. In carrying out this research, many auditors use “Audit Techniques Guides,” or ATGs. Some ATGs are concerned with issues that are frequently encountered during audits, including executive compensation, capitalization of tangible property, and passive activity losses—but others specifically address a particular industry or type of business, such as architecture, veterinary medicine, construction, or art galleries. 

These guides are publicly available through the IRS website—and because they’re publicly accessible, your business can use them to gain an understanding of how the IRS will judge your business in terms of tax law and regulatory compliance. 

How ATGs are used

Before they meet with taxpayers and their advisors, an auditor will first do certain research to understand the specific industries or issues at play, how income is received, the accounting methods commonly used, and any areas where there may be issues of compliance for the taxpayer. Since each return may involve issues, business practices, or terminology that is unique to a particular industry, IRS auditors must start by examining different types of businesses in addition to individual taxpayers and tax-exempt organizations. 

In the case that reported income or expenses are inconsistent with what’s expected for the industry or there are anomalies within the geographic area the business is located in, using the right ATG may allow auditors to reconcile any discrepancies. 

Where to find the latest ATGs

Not every industry has its own ATG, and some guides have been written or updated more recently than others. ATGs that the IRS has added or revised this year include guides for the Retail Industry (March 2021), Construction Industry (April 2021), Nonqualified Deferred Compensation (June 2021), and Real Estate Property Foreclosure and Cancellation of Debt (August 2021).

ATGs are primarily intended to assist IRS examiners in uncovering common methods of inflating deductions or hiding income. However, you can also use them to help ensure that your business isn’t engaging in any activity that might serve as a red flag to auditors. You can find a full list of ATGs here on the IRS website.

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