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Corporate Deductions and Corporate Transactions

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- Speculate about which specific types of corporate deductions are most likely to result in an IRS audit and what precautions should be taken to minimize the risk of audit. Provide a rationale for your response.
- Corporate transactions can result in differences between financial statement reporting and reporting for income taxes. These are known as book-to-tax differences. Analyze book-to-tax differences and provide a rationale for their existence. Provide examples to support your rationale.

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Solution Summary

This solution discusses the types of corporate deductions that are most likely to result in an IRS audit and the necessary precautions to take that would minimize the risk of an audit. This solution also explains book-to-tax differences and why they exist.

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- There are a few different things that trigger an IRS audit when we discuss corporate deductions. The IRS always looks for and flags corporate deductions that are unrealistic based on the size and nature of the business. The deductions must be reasonable. For example, it is unrealistic for a business with revenue of $100,000 per year to have $90,000 of deductions. This would be an apparent attempt to avoid paying income taxes on any profit from a C Corporation. The IRS looks at reality - if the business took in $100,000 in gross receipts and had deductions in the amount of X dollars, how was the business able to survive? This is called a reality check or a reality audit. The IRS determines if the deductions would still allow for the business to support its own operations.

The company can take a few steps to guard ...

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