ATG examination of cash intensive businesses

Cash Audit Techniques Guide (ATG) (Revised April 2010), (Apr. 16, 2010)
2010ARD 075-7

Audit Techniques Guide: Cash-intensive business: Examinations


Cash Audit Techniques Guide (ATG) - 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.

This Audit Techniques Guide (ATG) is presented in several chapters. These chapters can be accessed and then printed by following the links in the Table of Contents below.

Chapter 1: Introduction and Overview of the Cash Intensive Business
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
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
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
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
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
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
Definition of digital cash

Funding and using digital cash

Detecting the use of digital cash

Chapter 8: Underground Economy
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
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
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
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
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
Defined

Cash and Internal Controls

Self Consumed Items

Inventory Issues

Miscellaneous Income

Chapter 15: Laundromats (Under development)
Chapter 16: Scrap Metal
Introduction

Purchasers of Scrap Metal

Sellers of Scrap Metal