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An IRS Auditor’s Checklist of Items to Examine
Accounting manual or instructions providing guidelines as to what accounts are debited or credited, for contract transactions, and under what circumstances.
General ledgers and journals by entity.
Revenue journals or reports.
Schedule of contracts in process at year-end.
Detail of work in process by job number.
Detail of year-end prepaid expenses, accounts payable, and deferred income.
Contract manager’s file, or cost and income summaries, for select contracts.
Index of internal audit reports. Scan titles to identify those with audit potential.
When Auditing a Construction Company Auditors will determine if:
A contract qualifies as long-term.
The taxpayer considered all contracts that commenced during the year. They may elect to defer contracts that are less than 10 percent complete.
The contract price is correct.
The costs to date and estimated costs to complete projects are correct.
There are contingency reserves included in the estimated costs to complete a contract.
The taxpayer has adjusted the percent of completion by any risk factors because of some potential risk involved in certain phases of construction. The terms of the contract should be reviewed to identify contract price revisions, such as change orders, options and additions.
A contract is completed and accepted for purposes of the taxpayer’s normal method of accounting.
The following checklists come from the actual Audit Techniques Guide that the IRS uses to examine construction companies. Once you know what the IRS is digging for, you can shore up weak spots and improve your documentation. Talk with your tax adviser for more information.