What the IRS Does With Your Bank Records
Tax Audit Report #4
Here’s an obvious one when the IRS audits your small business. Let’s say you deposit most of the money from sales or from your customers in a single bank account. You can be sure that the IRS audit will proceed with a reconciliation of bank deposits to gross receipts. What does this mean in plain English? The IRS audit guidelines are helpful in this regard. They state:
- A useful audit procedure for small to medium-size taxpayers who deposit their gross receipts into a bank account is the reconciliation of bank deposits to gross receipts reported on the tax return. This means that the IRS audit will proceed to compare monthly bank deposits to monthly income reported in your books. If there is a discrepancy then this will will work as an IRS audit trigger or tax audit flag. More looking around will follow.
- Non-taxable sources of income are critical to this computation and should be identified first. This means that if you recovered damages in a lawsuit for violation of your patent this money, this deposit, should not be included in income (assuming the damage award is not a reimbursement for lost profits).
- If the deposit analysis shows no material discrepancy between deposits and gross receipts, then a testing of income transactions may be all that is needed to complete the examination of income.
- If the deposit analysis shows a discrepancy between deposits and gross receipts, the audit steps are expanded to determine the cause of the discrepancy.