By: A.J. Cook


The chances of catching a business paying less than its full share of taxes has increased dramatically, thanks to new auditing procedures.

In previous years, Internal Revenue Service agents auditing businesses spent most of their time looking at mundane issues common to most operations, such as travel and entertainment expenses. That's because the agents didn't understand the business. They weren't trained in the peculiarities of different industries.

Things are changing. The IRS now trains some auditors to be industry specialists. For example, it's training them to examine law firms so they will know when a retainer becomes taxable income, and service stations so they will understand the peculiar retail method of valuing inventories. Businesses will be audited by agents who know their business.

The changed emphasis in training has changed the audit approach. In the past the agency audited businesses based on income level, geographic location or the type of return -- corporate, partnership or sole proprietorship. So, for example, the most experienced agents would audit the high income corporate returns. Now it divides many businesses into industry-specific segments. It has 80 specialist audit groups for industry segments including architects, taxicabs, ministers, grain farmers, mortuaries, bars and restaurants and beauty and barber shops. How did it select these industries? The most plausible explanation is that these are industries where the most tax money seems to be hidden.

The IRS calls this the Market Segment Specialization Program, which is part of its modernization plan. The other phases include consolidating and streamlining administrative functions and expanding computer use.

Periodically the agency issues MSSP audit guidelines. Currently there are 20, with 60 more in the preparation stages. They are surprisingly thorough. Take the one written on the auto repair industry. This manual describes the body repair process and suggests the auditor tour the premises. It suggests documents agents should examine and questions to ask. The manual also lists what income and expense items to expect. For example, it tells auditors to look for income from rental company kickbacks in cases where the shop referred business to the company.

These manuals are designed for agents, but they can help answer questions for business people who want advance inside information about possible future audits. You can check with the Superintendent of Documents to see if one has been prepared for your industry. To get this information or to order a copy, call (202) 512-1800. The price runs from $2.50 to $24 each. Or you can visit the Government Printing Office internet web page at http://www.access.gpo.gov. This is an opportunity for businesses to scrutinize IRS audit procedures formerly cloaked in secrecy.