Chapter 10 Schedule M-1 Audit Techniques ... - IRS tax forms

1 Chapter 10 Schedule M-1 Audit Techniques Page 10-1 Chapter 10 Schedule M-1 Audit Techniques By Ken Johnson (Central Mountain) And Alta Chesney, (Gulf Coast) and Fred Sanchez (Gulf Coast), Reviewers INTERNAL REVENUE SERVICE TAX EXEMPT AND GOVERNMENT ENTITIES Table of Contents TABLE OF CONTENTS ---------------------------------------- ---------------------------------------- -------------------------1 OVERVIEW ---------------------------------------- ---------------------------------------- ---------------------------------------- 3 INTRODUCTION---------------------------- ---------------------------------------- ---------------------------------------- ----------- 3 OBJECTIVES------------------------------ ---------------------------------------- ---------------------------------------- ------------- 3 BASIC

2 INFORMATION ---------------------------------------- ---------------------------------------- -------------------------4 LINK OR BRIDGE---------------------------------- ---------------------------------------- ---------------------------------------- --- 4 Schedule M-1 DIFFERENCES----------------------------- ---------------------------------------- -------------------------------- 4 4 GENERAL CATEGORIES------------------------------ ---------------------------------------- ------------------------------------- 4 TIMING DIFFERENCES ---------------------------------------- ---------------------------------------- ------------------------5 TIMING DIFFERENCES----------------------------- ---------------------------------------- ---------------------------------------- -- 5 PERMANENT DIFFERENCES ---------------------------------------- ---------------------------------------- ----------------5 PERMANENT DIFFERENCES----------------------------- ---------------------------------------- ------------------------------------ 5 Schedule M-1 MECHANICS ---------------------------------------- ---------------------------------------- ---------------6 Schedule M-1

3 ---------------------------------------- ---------------------------------------- -------------------------------------- 6 DISCUSSION OF Schedule M-1 ---------------------------------------- ---------------------------------------- ------------------- 7 Schedule M-1 PRINCIPLES------------------------------ ---------------------------------------- ---------------------------------- 7 Schedule M-1 LINE ITEMS ---------------------------------------- ---------------------------------------- ----------------8 LINE 1 ---------------------------------------- ---------------------------------------- ---------------------------------------- --------- 8 LINE 2 ---------------------------------------- ---------------------------------------- ---------------------------------------- --------- 8 LINE 3 ---------------------------------------- ---------------------------------------- ---------------------------------------- --------- 8 LINE 4 ---------------------------------------- ---------------------------------------- ---------------------------------------- --------- 9 LINE 5

4 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 10 LINE 6 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 10 LINE 7 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 11 LINE 8 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 11 LINE 9 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 11 LINE 10 ---------------------------------------- ---------------------------------------- ---------------------------------------- ------- 11 Continued on next page Chapter 10 Schedule M-1 Audit Techniques Page 10-2 Table of Contents.

5 Continued AUDITING Techniques ---------------------------------------- ---------------------------------------- ------------------- 12 MECHANICAL ERRORS---------------------------------- ---------------------------------------- ----------------------------------- 12 BOOK EXPENSE NOT ON TAX RETURN---------------------------------- ---------------------------------------- ----------------- 13 NETTING ITEMS----------------------------------- ---------------------------------------- ---------------------------------------- -- 13 SIMPLE MISTAKES-------------------------------- ---------------------------------------- ---------------------------------------- -- 13 OMITTED ITEMS----------------------------------- ---------------------------------------- ---------------------------------------- -- 13 FASB'S---------------------------------- ---------------------------------------- ---------------------------------------- -------------13 CONSISTENCY----------------------------- ---------------------------------------- ---------------------------------------- ---------- 13 ADJUSTING JOURNAL

6 ENTRIES--------------------------------- ---------------------------------------- -------------------------- 14 INCORRECT ACCOUNT BALANCES-------------------------------- ---------------------------------------- ----------------------- 14 REVERSING DIFFERENCES----------------------------- ---------------------------------------- ------------------------------------ 14 SAMPLE IDR'S ---------------------------------------- ---------------------------------------- ---------------------------------- 15 EXHIBIT 1 ---------------------------------------- ---------------------------------------- ---------------------------------------- ---- 15 EXHIBIT 2 ---------------------------------------- ---------------------------------------- ---------------------------------------- ---- 15 EXHIBIT 3 ---------------------------------------- ---------------------------------------- ---------------------------------------- ---- 16 EMPLOYEE PLANS Schedule M-1'S ---------------------------------------- ---------------------------------------- -- 16 DEFERRED COMP.

7 ARRANGEMENTS---------------------------- ---------------------------------------- ------------------------ 16 QUALIFIED PLAN IRC 404(A)(5) ---------------------------------------- ---------------------------------------- ----------------- 16 NONQUALIFIED DEFERRED COMP. PLANS IRC 404(A)(6) ---------------------------------------- --------------------------- 17 COMP. ABSENCES IRC 404(A)(5) ---------------------------------------- ---------------------------------------- --------------- 18 SUMMARY ---------------------------------------- ---------------------------------------- --------------------------------------- 19 SUMMARY--------------------------------- ---------------------------------------- ---------------------------------------- ---------- 19 Schedule M-1 EXAMPLE ---------------------------------------- ---------------------------------------- ----------------- 20 TAX RETURN---------------------------------- ---------------------------------------- ---------------------------------------- ------ 20 LINE 1

8 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 20 LINE 2 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 20 LINE 3 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 20 LINE 4 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 21 LINE 5 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 21 LINE 6 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 21 LINE 7 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 21 LINE 8 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 22 LINE 9

9 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 22 LINE 10 ---------------------------------------- ---------------------------------------- ---------------------------------------- ------- 22 RECONCILE LINE 24 OF form 1120 TO THE EMPLOYER S SET OF BOOKS----------------------------------- -------------- 22 EXPLANATION----------------------------- ---------------------------------------- ---------------------------------------- ---------- 23 LINE 4 ---------------------------------------- ---------------------------------------- ---------------------------------------- -------- 23 Schedule M-1 RECONCILIATION ---------------------------------------- ---------------------------------------- ----- 24 STOCK OPTIONS 1,409,395 ---------------------------------------- ---------------------------------------- ---------------------- 24 Chapter 10 Schedule M-1 Audit Techniques Page 10-3 Overview Introduction Taxpayers have different objectives when they prepare the financial statements and when they complete their tax return.

10 The financial statements are prepared with an objective of maximizing income and thus increasing the net worth of the shareholders, while maintaining conformity with GAAP. The tax return is prepared with the object