Contractor’s Audit Guide – Introduction to IRS Audits
Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!
In 2009, the Internal Revenue Service issued the Construction Industry Audit Technique Guide (ATG) for use by IRS agents and for contractors. The contractor’s audit guide explains the processes and methods the IRS uses to examine a contractor. The end goal is to verify actual taxable income over an assigned tax year for a contractor. The IRS recognizes that this industry is complex and utilizes multiple methods to establish revenue and net profits. It is so complex, the guide is 257 pages long.
This article introduces the guide and its major sections and how to understand what areas are applicable to your construction company. If you need greater guidance, contact me through the ‘My Services’ page in the footer section below. The guide first explains what is a contract and how they tie to the Code, specifically Code Section 460. Then the guide further identify the differences between small contractors and large contractors. While explaining the two sizes, the guide delves into various methods of accounting used by contractors. Finally, the guide identifies the tools used to convert GAAP based accounting (financial in nature) to tax accounting.
The following sections explain these areas of the guide in more detail. Supplementary articles explain specifics in extended detail and teach you what to expect in an audit related to the respective area, subject matter, of the audit. Throughout this article are links in blue that connect you to an article I’ve written about that respective subject. If you are unaware or desire more detail, please click on the link and read further.
The Internal Revenue Service places a lot of credence on the construction contract for two important reasons:
- The contract stipulates the entire value of the project, AND
- The contract identifies the frequency of payment.
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