IRS Examination of Small Businesses

Categories: IRS CE, IRS Resolution
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About Course

This two-hour advanced continuing education course equips tax professionals with the specific, practical skills needed to represent a small-business client through an IRS examination — from understanding why the business was selected in the first place through responding to the final round of document requests. The course is built for enrolled agents and other tax return preparers who already handle small-business returns and want to represent those clients confidently and effectively under examination.

Participants examine small-business examination risk factors and the initial interview from the examiner’s own perspective, the Bank Deposits and Cash Expenditures Method and other indirect methods of proving income, business record reconstruction, the substantiation standards for gross receipts, expenses, payroll, and inventory, the Cohan rule and the Section 7491 burden of proof rules, and practical strategies for responding to Information Document Requests and managing a small-business examination.

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What Will You Learn?

  • Identify the specific factors that increase examination risk for a small business return
  • Apply the substantive content and preparation strategy for a small-business initial interview
  • Apply indirect methods of proving income, including the Bank Deposits and Cash Expenditures Method
  • Apply business record reconstruction techniques when books and records are incomplete
  • Apply the substantiation standards for gross receipts, expenses, payroll, and inventory in a small-business examination
  • Apply the Cohan rule and the burden of proof shifting rules under IRC §7491
  • Identify common small-business audit adjustments and apply practical examination response strategy

Course Content

Module 1 – Small-Business Examination Risk Factors and the Initial Interview
This module covers the specific factors that increase examination risk for Schedule C and closely held entity returns, and the substantive content of a small-business initial interview from the examiner's own perspective.

  • Small-Business Examination Risk Factors and the Initial Interview

Module 2 – Business Record Reconstruction and Bank Deposit Analysis
This module covers the Bank Deposits and Cash Expenditures Method, markup analysis for cash-intensive businesses, and practical techniques for reconstructing business records when books are incomplete.

Module 3 – Substantiating Gross Receipts, Expenses, Payroll, and Inventory
This module covers Form 1099-K reconciliation, Section 274 strict substantiation standards, the Cohan rule and its statutory limits, the Section 7491 burden of proof rules, and payroll and inventory substantiation.

Module 4 – Common Adjustments and Practical Response Strategy
The final module covers common small-business audit adjustments, Schedule C versus closely held entity adjustment mechanics, IDR document production strategy, and practical strategies for managing a small-business examination's scope.

Final Assessment – IRS Examination of Small Businesses
You have completed an advanced review of IRS examination practice specific to small businesses, covering examination risk factors and the initial interview, indirect methods of proving income, substantiation standards for gross receipts, expenses, payroll, and inventory, and practical examination response strategy. You are now prepared to demonstrate your understanding of the key concepts. The following final examination assesses your knowledge of the material covered in all four modules. A passing score of 70% is required to successfully complete the course.

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