2. Long-term contracts. IRS agents take a close look at the completion dates of jobs, with an eye toward determining whether a company is properly using the completed contract or percentage of completion methods.

Under completed contract accounting, the focus is just what it sounds like—completion. Agents are taught to look for signs that the end of a job was deliberately delayed, particularly when 95% of a job is completed in one year, with the remainder held over to a second year.

Agents also look for changes in a business’ contracts to determine if they involve separate projects that should be treated as separate contracts. For tax purposes, that can make the original order end sooner than you planned. And if a job calls for building identical units, auditors could determine that each unit be treated as a separate project under a separate contract. That hinders you from deferring income until all units are finished.

3. Independent contractors. In an audit, you can pretty much count on IRS agents checking your business for independent contractors. And if they decide an employee is improperly classified as a contractor, you can be liable for substantial back payroll taxes, penalties and other costs. The IRS also warns auditors that “smaller contractors ... may report income for only a portion of their work…. Some contractors have been willing to work for 20% to 25% less on the condition that no Form 1099 is issued.”

4. Nooks and crannies. IRS agents look for indications of unreported work and income shifting between related parties. Save all payroll records, correspondence, freight bills, travel expenses and shipping tickets to substantiate your deductions. Agents also search for, among other things, evidence of work done at less than fair market value for relatives and friends and personal use of company-owned cars.

Before your company is hit with an IRS audit, talk with your tax adviser to make sure all involved parties have a clear understanding of the practices your company employs. Pay particular attention to cash flow and expansion plans. If you determine your tax reporting method is high risk, then you may want to change it voluntarily before you hear from the IRS. This could avoid a retroactive change that covers several years and permit you to spread any income taxes over four years. If an auditor forces a change, taxes, interest and possibly penalties are due immediately.

Geri Gregor is the partner-in-charge of Grassi & Co.’s Consulting Division, as well as the leader of the firm’s Construction Practice. For more information on this topic or other related industry-related topics, Gregor can be reached at 516-336-2496 or via e-mail at ggregor@grassicpas.com.