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Utilizing The IRS Benchmarks For Appropriate Expenses By Industry
Does the IRS keep the benchmarks that they go off of for expenses by industry private, or can I get my hands on those?
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Listen to the audio
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In this audio snippet, you'll hear about:
- They are available to review under the freedom of information act
- They are on the IRS web site
- Odd tax returns are more likely to be audited
- But, it depends on how the industry has done that year as a whole.
Audio Transcript
Travis:
I
was wondering––something kind of piqued my interest in what you were
saying––does the IRS keep those benchmarks that they go off of for
different categories of business private, or is that something that a
business owner can get their hands on?
Yosef:
Well, the answer is that the IRS actually has publications which they
provide to their auditors which, under the Freedom of Information Act,
everybody is entitled to review. It's actually on the IRS website. I
could not tell you right now, off the top of my head, where it is.
Travis:
It's an enormous website.
Yosef:
I'm thinking of sticking it up on a website myself. But I will actually
use these publications before representing a taxpayer before the IRS,
just so that I know what the IRS's approach is going to be. This way I
can defend my client appropriately. And there's nothing wrong with
doing that.
Travis:
Wow. That's amazing, Yosef. Find out what their perspective is so that you can get better on your end.
Yosef:
I can tell you that what you will find in these publications, they are
very thorough. The IRS is not stupid. The auditors might not be that
bright.
Travis:
[laughs]
Yosef:
But the IRS, there are some very gifted people there, extraordinary
gifted people. Some of those gifted people are so gifted that they
could have worked in any other sector in the world, but they like
working for the IRS and they like making positive public policy
contributions.
That
being said, if you're asking regarding benchmarks, I don't necessarily
know if I have the answer to that question. I think that some
benchmarks are going to be in those publications, but at the same time,
every tax return for a business, whether it's on your individual tax
return or whether it's a separate entity's return, there will be a
business code.
The IRS will basically tally up all the
returns from those businesses and develop certain averages, or
benchmarks, for what's typical in the industry. And my hunch, again,
this is purely speculation, but it actually is quite logically, is that
if your financial rations are beyond a particular number of standard
deviations from the average or the norm, you probably will be flagged
for an audit.
What that percentage is going to be might
change from year to year depending on what everybody else is doing as
well, because, think of this from the IRS's perspective, you can't
audit every tax return every year.
Travis:
Right. No way possible.
Yosef:
It's not possible. So it would make sense to look for the ones that are
outlying and to understand why those are so much more different than
the rest of the crowd. And the way that they can actually assess
outliers is by looking at "OK, what is normal this year and what's not?"
If
there has been an economic recession in the United States, certain
industries are going to be far more elastic than other industries. What
that means is that if the industry is more price–sensitive, the whole
industry, entirely, will show a downturn. So you can't use a standard
benchmark to see whether a particular company is performing well or
not, you may have to look at, "OK, how is everybody doing? And let's
see why this person might be doing better or worse than the others."
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