Cash Intensive Businesses Audit Techniques Guide - Table of Contents

Revision Date - April 2010

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

Chapter 1: Introduction and Overview of the Cash Intensive Business (PDF)

• Statement of Purpose
• Introduction and Overview of the Guide
• Respecting the Taxpayer's Privacy
• Definition of a Cash Business
  • Using a Cash Register
  • Businesses without a Cash Register
• Books and Records

Chapter 2: Pre-audit and Background Review of the Tax Return (PDF)

• Pre-Contact Analysis of the Tax Return
• Review of Internal Sources
  • Access IDRS or MACS Information
  • Tax Attaché (TA)
  • Third Party Contacts: Public Records Check
• Review of External Sources
• Comparative Analysis and Ratio Analysis
  • Vertical Analysis and Industry Ratios
  • Comparative Ratios
    • Gross margin (gross profit) percentages
    • Inventory turnover
    • Analysis of ending inventory balances
    • Change in net sales from year to year
    • Change in cost of sales from year to year
• Other Investigative Sources
  • Access Treasure Enforcement Communication System (TECS) Database—Passenger Activity Query and I-94 database
  • Currency and Banking Retrieval System (CBRS)
  • Immigration Files
  • Loan Application Files
  • Bank Records/Financial Records of Foreign Lender or Donor
  • Asset Locator Databases
  • Interviewing Actual Foreign Lender/Donor
  • Interviewing Other Potential Witnesses
  • Summons U.S. Parent Bank for Records Located in Its Foreign Branch

Chapter 3: Initial Interview (PDF)

• Interview the Taxpayer
  • Accounting for Cash
  • Cash on Hand
  • Business History
  • Financial Information
• Summary of Key Points
• Importance of Issuing a Summons
• Authority
  • Time and Place of Examination

Chapter 4: Minimum Income Probes (PDF)

• Conducting the Required Minimum Income Probes
  • Financial Status Analysis
  • Interview the Taxpayer
  • Tour the Business
  • Evaluate Internal Controls
  • Reconcile Income to Books
  • Test Gross Receipts
  • Analyze Bank Accounts
• Using Financial Status Audit Techniques
• Respecting the Taxpayer's Privacy

Chapter 5: Examination Techniques (PDF)

• Examination Techniques for a Cash Business
  • Purchases can Reveal Sales
  • The Role of Money Orders and other Money Transfer Systems
  • Sources
  • Hidden Family Transactions
  • Check Cashing Services
• Indirect Methods
  • Percentage Markup Method (and Unit Volume Method)
  • Fully Developed Cash T-Account Method
  • Source and Applications of Funds Method
  • Bank Deposit Method
  • Net Worth Method
• Key Points to Audit of Books and Records

Chapter 6: Evaluating Evidence (PDF)

• Techniques to Corroborate or Refute Income-Related Items
• Evaluate the Initial Facts Concerning the Non-Taxable Sources and the Current Status of the Audit
  • Other Considerations
• Examples of Using Specific Industry Audit Techniques
• Special Focus Issues
  • Net Operating Loss and Passive Activity Loss Considerations
  • Employment Tax Issues
  • Inadequate Records
  • Proper Development of Cases
  • Fraud Considerations
  • Cash Hoard

Chapter 7: Digital Cash (PDF)

• Definition of digital cash
• Funding and using digital cash
• Detecting the use of digital cash

Chapter 8: Underground Economy (PDF)

• Definition of the Underground Economy
  • Traits of an Underground Worker
• Examples of Possible Underground Activities
• Locating Underground Economy Workers
• Audit Techniques

Chapter 9: Bail Bonds (PDF)

• Bail Bond Defined
• State Control
• Transacting Bail
• Surety Contracts
• Subagents
• Books and Records
• Terminology
• Internal Sources of Information
• Third Party Sources
• Initial Interview
• Required Filing Checks
• Primary Audit Issues and Techniques
  • Gross Income
  • Income from BUF
  • Premium Income
  • Reimbursed Expenses
  • Collateral
  • BUF payment deductions
  • Bond Costs
  • Change in Accounting Method
  • Establishing Fraud

Chapter 10: Beauty Shops (PDF)

• Beauty Salon Defined
• Income
• Salon Income
• Service Income
  • Method 1-Service Income Formula
  • Example-Service Income Formula
• Retail Income
  • Method 2-Retail Income Formula
  • Method 3-Retail Income Formula
  • Example-Retail Income Formula
• Rental Income
  • Method 4-Rental Income Formula
  • Example-Rental Income Formula
• Employee vs. Independent Contractor
• Tips
  • Determining a Tip Rate
  • Calculating Unreported Tips
• Other Audit Considerations
• Initial Interview and IDR
• Glossary

Chapter 11: Car Wash (PDF)

• Car Wash Defined
• Internal Sources of Information
• External Sources of Information
• Audit Techniques
  • Income
  • Water Consumption Method
  • Water Consumption Formula
  • Soap/Chemical Consumption Method
  • Soap/Chemical Consumption Formula
  • Expenses
• Initial Interview and Information Document Request
• Case Studies
• Glossary

Chapter 12: Check Cashing Locations (Under development)

Chapter 13: Coin Operated Amusements (PDF)

• Defined
• Tour of the Business
• Depreciation- Coordinated Issue- Gaming Industry
  • Issue
  • Conclusion
  • Facts
  • Law and Analysis
• Audit Techniques

Chapter 14: Convenience Stores, Mini-Marts and Bodegas (PDF)

• Defined
• Cash and Internal Controls
• Self Consumed Items
• Inventory Issues
• Miscellaneous Income

Chapter 15: Laundromats (PDF)

• Overview
• Income
• Initial Interview and Information Document Request
• Utility Consumption Analysis

Chapter 16: Scrap Metal (PDF)

• Introduction
• Purchasers of Scrap Metal
• Sellers of Scrap Metal

Chapter 17: Taxicabs (PDF)

• Taxicab Industry Defined
• Regulatory Environment of the Taxicab Industry
  • Certification, licensing and permits
  • Taxicab rate schedule
    • Determining the Applicable Rates and Fees
• Sources of Taxicab Industry Information
  • External sources of information
  • Internal sources of information
• Primary Audit Issues
  • Books and records
    • Income
    • Expenses
  • Tips
    • Determining tip income
    • Calculating unreported tips via credit card sampling
    • Tips versus finder’s fees
  • Employee VS independent contractor
    • Checking worker classification
• Audit Techniques
  • Taxicab companies
  • Taxicab owners/operators
  • Taxicab drivers
    • Using the taxi formula (a.k.a. the "cab formula")
    • Taxi formula example
• Initial Interview and Information Document Request
  • Background
  • Operations
  • Books and records
  • Examining tax returns
• Glossary of Taxicab Terms
• Tax Law, Regulations, Court Cases, and Other Authorities
  • Internal Revenue Code:
  • Revenue rulings/procedures
  • Revenue Ruling 87-41, 1987-1 C.B. 296, discussing twenty common-law factors considered in determining whether a worker is an employee or independent contractor.
  • Court cases
  • Publications