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Reconciliation of Bank Records

Tax Audit Report #2

The first step the IRS audit guidelines require of an IRS tax auditor when he or she is reviewing your bank records is to do what’s called a “bank account reconciliation”. In doing the bank account reconciliation the IRS tax auditor will review the year-end bank account reconciliations prepared by you to determine how much audit work is required. As a general rule, if the bank accounts reconcile back to the books, then all transactions are probably recorded somewhere in the records. The transactions will then be tested for proper recordation. This means that at this point the auditor is going to sample your tax records for completeness and for accuracy. If reconciliations do not exist or the bank accounts do not reconcile to the books, additional audit procedures will necessarily follow.

IRS audit guidelines suggest 4 general IRS audit steps that should be taken in all tax audits, when your bank account records are being reconciled:

1. Trace the ending balance to the general ledger.
2. Review any outstanding checks and investigate their status.
3. Review outstanding deposits and determine if all are included in the reconciliation.
4. Trace total deposits and disbursements per the reconciliation to the general ledger account entries.

The key to all this – the key to satisfying the IRS tax auditor – is to make sure the bank accounts reconcile back to the books. If they do, then the auditor is usually satisfied that the bank accounts and your books in fact reconcile, and the investigation into your bank records will end. This portion of the income tax audit is called the reconciliation of bank records.

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