When the IRS Tells its Examiners What to Look For, You Ignore that Guidance at Your Own Risk

To help its auditors when conducting a tax audit, the IRS often provides written guidance regarding what the auditor should focus on. This information is often available to the public. If you are a taxpayer in a field or area that is subject to such guidance, it is prudent to review that information. If an auditor comes in the door, you can be assured he will be consulting those guidelines in conducting the audit. By having part of the IRS' "game plan" in advance of an audit, the taxpayer can more closely comply with what the IRS desires and thus limit the risk of an audit examination.

For example, earlier this week the IRS issued a "Field Directive on the Planning and Examination of Cost Segregation Issues in the Biotech/Pharmaceutical Industry." This examination guidance deals with the issue of putting the various assets typically owned by biotech and pharmaceutical industries into the proper depreciation categories. Since different categories of assets give rise to different periods of depreciation, placement into the proper category is needed for computing the correct depreciation deduction. While it is obvious into which category some assets belong, others can be more difficult to categorize. Taxpayers who want to minimize audit risk on this issue are well served to consult the Field Directive in making its categorizations.

To see the table itself, go to link.