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IRS Tax Audit Manual for the Manufacturing Industry

Manufacturing Industry Edition

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Description

IRS Tax Audit Manual for the Manufacturing Industry

Overview of the industry. Emphasis on change of accounting method, IRC section 263A, and inventory.

TABLE OF CONTENTS

  • Chapter 1
    • Introduction Purpose 1-1
    • How This Guide Is Presented 1-1
    • Manufacturing 1-2
    • Principal Industry Activity (PIA),
    • Principal Business Activity (PBA), and
    • Standard Industrial Classification Codes 1-3
    • Audit Technique Guides (ATG) 1-4
    • Industry Specialization Program (ISP) 1-4
  • Chapter 2
    • Understanding the Production
    • Process Introduction 2-1
    • Types of Manufacturers 2-1
    • Costing Methods for Manufacturing 2-2
    • Planning the Audit 2-2
    • Identification of Potential Issues/Tax
    • Return Analysis 2-2
    • Specialty Referrals 2-7
    • Comparative Years Analysis 2-8
    • Ratio Analysis 2-9
    • Initial Interview 2-10
    • Touring the Facilities 2-11
    • Specific Observations 2-13
    • Flowcharting the Production Process and
    • Related Source Document Flow 2-15
  • Chapter 3
    • Required Filing Checks Introduction 3-1
    • Employment Tax Reconciliation 3-1
    • Employee Versus Independent Contractor 3-2
    • Other Employment Tax Issues — In General 3-4
    • Interest Free Adjustments 3-6
    • Information Returns 3-6
    • Form 1099 3-7
    • Examination Techniques 3-7
    • Information Returns Statute of Limitations 3-10
    • Backup Withholding 3-10
    • Assertion Procedures 3-11
    • Abatement Procedure 3-12
    • Related Returns 3-12
    • Identifying Related Returns 3-13
    • Corporate Taxpayer — Shareholder Issues 3-13
    • Other Related Return Issues 3-17
    • Foreign Entities 3-20
  • Chapter 4
    • Balance Sheet Introduction 4-1
    • Interrelationship Between Balance Sheet and
    • Income Statement 4-2
    • Effect of Balance Sheet Adjustments on
    • Taxable Income 4-3
    • Preliminary Audit Steps 4-4
    • Reconcile the Book Accounts to the Return 4-4
    • Comparative Analysis 4-5
    • Auditing a Balance Sheet Account and
    • Schedules M-1 and M-2 4-5
    • Cash 4-6
    • Accounts Receivable 4-10
    • Inventory 4-14
    • Loans to/from Shareholders 4-14
    • Building and Equipment 4-18
    • Accounts Payable, Other Current Liabilities and
    • Other Liabilities 4-21
    • Capital Stock/Capital Account 4-24
    • Retained Earnings 4-25
    • Schedule M-1 and Schedule M-2 4-26
  • Chapter 5
    • Sales and Income Issues Introduction 5-1
    • How Sales Are Generated 5-1
    • Independent Sales Staff 5-1
    • In-house Sales Staff 5-2
    • Trade Shows 5-2
    • Newspaper Advertisements/Mailers 5-2
    • Sales Marts 5-2
    • Word of Mouth 5-2
    • Public/Employee Sales 5-2
    • General Audit Techniques 5-2
    • Understanding the Sales Cycle 5-2
    • Understanding the Accounting
    • System/Internal Controls 5-4
    • Specific Audit Techniques 5-4
    • Internal Revenue Manual 4231.582 5-4
    • Other Recommended Income Probes 5-7
    • Other Income Issues 5-8
    • Unreported Interest Income 5-8
    • Bargain Purchases Under
    • IRC section 311(b) 5-8
    • Lease Inclusion Income:
    • Passenger Automobiles 5-9
    • Contra-Sales Accounts 5-10
    • Returns 5-10
    • Allowances in General 5-10
    • Warehouse Allowance 5-10
    • Markdown Allowance 5-11
    • Advertising Allowance 5-11
    • Yearend Allowance 5-11
    • Volume Allowance 5-11
    • Trade Discounts 5-11
    • Cash Discounts 5-12
    • Accounting for Returns,
    • Allowances and Discounts 5-12
  • Chapter 6
    • Inventory Introduction 6-1
    • Why Audit Inventories? 6-1
    • Types of Manufacturers 6-5
    • Custom 6-5
    • Production 6-5
    • Combination 6-6
    • Costing Methods for Manufacturing 6-6
    • Job Order Costing 6-6
    • Process Costing 6-6
    • Operation Costing 6-6
    • Inventories 6-7
    • Auditing Inventory 6-8
    • General Audit Techniques 6-9
    • Issues 6-18
    • Incorrect Inventory Counts and Omissions 6-18
    • Improper Valuations 6-24
    • Inventory Write-Down Under the
    • Lower of Cost or Market Method 6-25
    • Audit Techniques – Improper Valuations 6-28
    • Standard Cost Variance Treatment 6-30
    • Other Considerations 6-35
    • Practical Capacity 6-35
    • Idle Capacity 6-35
    • LIFO Inventory Valuation 6-35
    • Long-Term Contracts 6-36
  • Chapter 7
    • IRC Section 263A –
    • Uniform Capitalization Introduction 7-1
    • IRC Section 263A –
    • Uniform Capitalization 7-1
    • All Direct Costs 7-2
    • All Indirect Costs Associated with Production 7-2
    • Audit Techniques 7-3
    • IRC Section 263A Regulations: Post 199 7-15
    • IRC Section 263A Regulations:
    • Post 1993 for Self-Constructed Assets and
    • Interest Capitalization 7-16
  • Chapter 8
    • Change in Accounting Method Introduction 8-1
    • What Is a Change in Accounting Method? 8-1
    • IRC Section 481
    • Adjustment 8-4
    • Category A or Category B
    • Method of Accounting 8-5
    • Year of Change 8-6
    • IRC Section 481(a) Adjustment Period 8-6
    • How IRC Section 481 Interacts with an
    • Inventory Adjustment 8-7
    • IRC Section 481(b)(1) and
    • IRC Section 481(b)(2) Limitations 8-10
    • Revenue Procedure 94-49 8-13
    • Scope of Rev. Proc. 94-49 8-13
    • Procedures to Obtain Automatic Consent 8-14
    • Other 8-14
    • Revenue Procedure 95-25 8-14
    • Revenue Procedure 95-33 8-15
    • Court Cases 8-15
  • Chapter 9
    • Research and Development Introduction 9-1
    • IRC Section 174: Definition of Research and
    • Experimental Expenditures 9-1
    • IRC Section 41:
    • Credit for Increasing Research Activities 9-3
    • Definition of “Qualified Research” 9-3
    • Definition of “Qualified Research Expenses” 9-6
    • Definition of “Qualified Wages” 9-6
    • Qualified Supplies 9-7
    • Qualified Contract Research 9-7
    • Computer Software Development Costs 9-8
    • Revenue Procedures 69-21 9-8
    • Costs to Develop Internal-Use Software 9-8
    • Summary of Computer Software
    • Development Costs 9-10
    • Specific Issues Relating to the Research Credit 9-10
    • Wages Paid to Technical Writers
    • Re: User Manuals 9-10
    • Employee and Employer Contributions to a Deferred
    • Compensation Plan as Defined in Section 1.401(k) of
    • the Income Tax Regulations 9-11
    • Wages paid to Managers Above the
    • Level of First-Line Supervisors 9-11
    • Base Period Recomputation 9-12
    • BETA Testing –
    • Testing Conducted by Customers 9-12
    • Costs Attributable to Reviewing a
    • Competitors Product 9-12
    • Costs to Develop Internal Use Software 9-13
    • Software Expenditures Capitalized for
    • Book Purposes Per FAS 86 9-13
    • Small Tools and Purchased Software 9-14
    • Costs of Developing Generic Drugs 9-14
    • Summary of Computation of the Research Credit 9-14
    • Computation of the Research tax Credit 9-16
    • Base Amount Computation 9-16
    • IRC Section 280C(c)(3): Reduction of
    • Credit Versus Expense 9-19
    • Alternative Minimum Tax 9-19
    • Research and Development Tax Shelters 9-20
    • Audit Techniques 9-20
  • Manufacturing Glossary G-1

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