A Business Tax Lawyer Explains IRS Audit Record Reconciliation

Check the name and taxpayer identification number against the return. A sole proprietor reports business activity on an individual return, while a corporation generally files separately. The business’s tax classification determines which return and records matter. Read the response deadline in the notice or Information Document Request, which may appear on Form 4564. If you need additional time, contact the identified IRS employee before the deadline and document any agreed extension.

Give each requested item a reference number and connect it to the relevant return line, ledger account, and supporting files. Start with the return as filed and identify any later amendments. Preserve the accounting reports and adjustments used to prepare those filings, since a current ledger may contain subsequent changes. For an IRS audit, the reconciliation should let the examiner follow the calculation from the reported figure to individual transactions.

Compare invoices or point-of-sale totals with payment processor reports and bank deposits. Processor payouts may be reduced by fees, refunds, or chargebacks, while information returns may report gross payments. Identify how each amount entered the books so that the reconciliation does not count receipts twice or deduct the same fee twice. Include cash sales even when the business used the cash directly rather than depositing it. An unexplained difference calls for investigation; it does not establish omitted income by itself.

Transfers between accounts belonging to the same taxpayer generally do not create additional income. Genuine loan proceeds also generally differ from sales receipts. Match transfers to both account statements and borrowing to loan documents and disbursement records. Separate those transactions from amounts whose treatment remains uncertain. For timing differences, record the invoice date, payment date, and accounting treatment. A year-end invoice’s date alone does not determine when the income must be reported.

Connect each questioned expense to an invoice or receipt, payment evidence, and its business purpose. A bank statement may show that money left the account without explaining what the payment covered. Identify personal portions, reimbursements, and duplicate entries where relevant. Equipment purchases may require capitalization and depreciation analysis rather than a current deduction. When examining wage expenses, compare payroll registers with the reported deduction and identify relevant adjustments. That comparison does not, by itself, resolve separate payroll tax obligations.

Request replacement invoices, statements, contracts, or other reliable evidence when records are missing. If you prepare a reconstruction, label it accordingly and explain which documents support it. Preserve the original records and keep later explanations separate from notes created at the time of the transaction. Certain expenses, including travel and vehicle use, have specific substantiation requirements that unsupported estimates cannot satisfy. Whether alternative evidence is sufficient depends on the expense and why the original records are unavailable.

Create an index connecting each request number to the submitted files and relevant pages. Record submission dates, delivery confirmations, follow-up requests, and substantive conversations with the examiner. After a call, note the date, participants, and any agreed next steps. If a later response corrects an earlier explanation, identify the correction and its reason. The following table offers a working format; it is not an IRS-required form.

A missing invoice raises an evidence issue. A disagreement over whether a documented purchase must be capitalized raises a tax treatment issue. Before responding to a proposed adjustment, identify which transaction, amount, or treatment the examiner challenges. A business tax lawyer can review the legal issue while the accountant explains the underlying entries and calculations. If the examination develops into an IRS business tax dispute, later notices may carry separate response or filing deadlines. Continuing to send documents does not extend those deadlines. Further review of tax disputes should therefore begin with the specific notice and the issue that remains unresolved.