Retail Industry Audit Technique Guide NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date. All references to code sections are to the Internal Revenue Code (IRC) unless otherwise specified. Publication Date: February 2009 Table of Contents Chapter 1: Description of the Retail Industry ................................................................................................ 5 Purpose for the Audit Technique Guide .................................................................................................... 5 Description of the Retailer ......................................................................................................................... 5 What Retailers Do ..................................................................................................................................... 5 Demographics of the Retail Industry ......................................................................................................... 5 Retail Entities ............................................................................................................................................. 6 Useful Retail Web Sites ............................................................................................................................. 6 Unique General Industry Terminology ....................................................................................................... 6 Chapter 2: General Issues in Retail ............................................................................................................. 8 Initial Interview ........................................................................................................................................... 8 Information Document Request ................................................................................................................. 9 Books and Records ................................................................................................................................... 9 Income Issues ......................................................................................................................................... 10 Cash Records ...................................................................................................................................... 10 Indirect Methods .................................................................................................................................. 11 Sources of Receipts ............................................................................................................................. 16 Other Retail Income Sources ............................................................................................................... 20 Cost of Goods Sold ................................................................................................................................. 21 Retail Inventory: IRM 4.43.1 ............................................................................................................... 21 Personal Consumption of Inventory ..................................................................................................... 22 Retail Inventory Method (RIM): IRM 4.43.1.3.1 ................................................................................... 22 Last In, First Out (LIFO): IRM 4.43.1.3.1.3 .......................................................................................... 24 Stock Ledger (INVENTORY): IRM 4.43.1.3.2.5.4 ............................................................................... 24 Point of Sale Perpetual Inventory Control System .............................................................................. 24 Valuation Of An Acquired Retailers Inventory (PDF) (Coordinated Issue) .......................................... 24 Purchases ............................................................................................................................................ 24 Expenses ............................................................................................................................................. 25 Excise Tax Issues ................................................................................................................................ 27 Employment Tax Issues/Information Returns ...................................................................................... 27 Chapter 3: Examination Techniques for Specific Industries ....................................................................... 29 Electronic Business, Online Retail .......................................................................................................... 29 Introduction .......................................................................................................................................... 29 Internet Investigative Tools .................................................................................................................. 29 Audit Techniques & Interview Questions ............................................................................................. 30 Income ................................................................................................................................................. 33 Cost of Goods Sold .............................................................................................................................. 33 Page 1 of 158 Expenses ............................................................................................................................................. 33 Glossary ............................................................................................................................................... 35 EXHIBIT 1: E-Business ........................................................................................................................ 35 Video/DVD Rental Business .................................................................................................................... 42 Introduction .......................................................................................................................................... 42 Income ................................................................................................................................................. 42 Cost of Goods Sold .............................................................................................................................. 42 Expenses ............................................................................................................................................. 42 Glossary ............................................................................................................................................... 43 Statistics ............................................................................................................................................... 44 Gasoline Service Stations ....................................................................................................................... 45 Introduction .......................................................................................................................................... 45 Initial Interview Questions .................................................................................................................... 45 Income ................................................................................................................................................. 46 Expenses ............................................................................................................................................. 50 Web Sites ............................................................................................................................................. 57 Glossary ............................................................................................................................................... 57 Statistics ............................................................................................................................................... 59 Independent Automobile Dealerships ..................................................................................................... 60 Introduction .......................................................................................................................................... 60 Initial Interview ..................................................................................................................................... 63 Books and Records .............................................................................................................................. 66 Income ................................................................................................................................................. 66 Cost of Goods Sold and Purchases/Inventory ..................................................................................... 72 Purchases from Other Dealers ............................................................................................................ 73 Expense Issues 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