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Chapter 5 - Interview

Importance of the Interview

All techniques in this Guide were tested in actual contractor cases. The process of developing a detailed, specific interview plan was found to be a necessity at the inception of each audit. Sometimes follow-up interviews were needed, as taxpayers altered their testimony when confronted with examination findings.

The quality of your initial observations and questioning will affect the overall quality and success of the entire examination, whether or not you have developed third party information or noted other items indicative of non-compliance in your precontact analysis of the returns.

Review of the Basic Techniques

The purpose of your interview is to secure from the taxpayer a general financial picture and familiarize yourself with the business operations and recordkeeping practices. After the interview, you should be in a position to see if the income bears an appropriate relationship to the taxpayer's standard of living.

Planning is essential to the success of the interview. The interview should be planned in advance, keeping in mind your objectives and the results of your pre-contact analysis and your understanding of how this industry should work. If a questionnaire is used, it should be written specifically for the case in hand. The completed document should be a flexible guideline that will assist but not restrict your interview.

Your questioning must be thorough and specific and the responses accurately and completely recorded. State questions simply and be certain that they are understood, repeating, and rephrasing if necessary to be sure that the answers are complete and responsive. Listen carefully to the taxpayer and be sure you understand the answers given. Your documentation of the interview should be sufficient to provide an accurate and retrievable record rather than a transcript of the conversation.

The questions you ask should generally enable you to obtain the background of the taxpayer and his or her business, to familiarize yourself with the business operation, to understand the accounting system, to fix responsibility for the records, and to identify sources of income.

Guideline for Interviewing the Contractors

When interviewing reforestation contractors, specific emphasis should be given to the areas where non-compliance has proven to be the highest and to those which may, at a later date, be presented as a defense against understatement of income. Since it is not uncommon to find that some contractors have little or no fluency in English, it is important to determine if the assistance of an interpreter will be required or available prior to the initial appointment.
The understatement of income and failure to pay employment taxes are the primary, but by no means the only, areas of adjustment on the contractors' returns. Defenses against the understatement of income can be cash hordes, loans, or gifts in the case of non-specific understatement, misunderstanding or poor communication with the return preparer; these are the more common in specific understatements.

A partial list of items you may wish to incorporate in your interview plan are given below. The particular circumstances of an individual case, including data accumulated prior to the interview, will suggest alterations and additions. It is not intended for use as a pro forma.

Suggested Questions

Business Operations

1. How long have you been in the reforestation business?
2. How did you get started in the business?
3. Have you operated at other locations or under another assumed business names? If so, where and what other names?
4. Are you a prime contractor or a subcontractor?
5. Who did you work for in the audit years, Federal/state agencies, private companies, or other contractors? List.
6. What types of contracts did you complete: Thinning or tree planting? Other?
7. Describe the method you use to determine how much you will bid on any given contract.
a. What type of expenses are included in your job bid?
b. How much profit do you expect to make on a contract?
8. Where there any months that you did not work? When?
9. Are you required to supply transportation for workers?
10. What tools do you supply for the workers?
11. How are you paid for the work that you do?

Income

1. How much cash did you keep on hand during this year? How much did you have at the beginning and end of the year?
2. How did you account for your business income? Are checks cashed or deposited? What percentage of checks are cashed? Why is this done?
3. How did you determine how much income to include on your tax return, that is, bank deposits, Forms 1099, etc.?
4. Did you have income from any source other than reforestation contracts? What was the source?
5. Do you have a safe deposit box? What does it contain?
6. Was there any additional income -- any considered non- taxable?
7. Were there any non-taxable sources of funds -- that is, refunds, loans, insurance proceeds, gifts, inheritances, repayments or reimbursements, or assets sold? How much and when?
8. Identify all savings, checking, money market accounts, and CDs.
9. Identify all loans, investments, sales of assets.
10. Do you have a credit line? If so, are income checks deposited to this account?
11. Did you assign any Forest Service contracts to a bank or to a credit line account? Identify the account.
12. Did you receive Forms 1099 for all the income you received in this year? Did you retain all the Forms 1099 you received?

Accounting Records

1. What accounting method is used (that is, cash or accrual)?
2. Who kept the books and records in this year?
3. What books are maintained?
4. What other kinds of records are kept -- that is, time cards, duplicate deposit slips, cost sheets?
5. How and when is income recorded? Who records it and when?
6. Who makes the deposits?
7. Is all income deposited? In which accounts do you deposit income checks?
8. Are expenses paid by check or cash?
a. What type of expenses are paid with cash?
b. What records are maintained for payments made in cash?
9. What is your bill payment policy?
10. What records are supplied to the bookkeeper or preparer by the taxpayer?

Employee versus Subcontractors

1. Are all wages included on the tax return?
2. Do you pay wages in cash? Are cash wages reported on the employment tax returns? Were Forms W-2 or 1099 issued for all labor including cash wages? Did you subcontract any of your contracts in this year?
3. Describe what type of work is done by your employees? Do the subcontractors have any other duties?
4. Name all subcontractors used during the audit year?
5. Do the subcontractors have DBA's? What are they?
6. Do you have written agreements with the subcontractors?
7. How much do you pay the subcontractors? How is this amount determined?
8. Are the subcontractors reimbursed for any expenses? What for? How much? How are reimbursements accounted for?
9. Do you issue Forms 1099 to all subcontractors?
10. Do all your subcontractors have a Farm Labor License?
11. Did the subcontractors work for others during this year?
12. Do the subcontractors supply the tools for the workers?
13. Do you supply transportation for the subcontractors?

Living Expenses

-- Identify all personal living expenses -- use Form 4822 as a guideline and determine if expenses are paid in cash or by check. (Although emphasis here has been placed on detecting specific omissions of income, this data has later proven useful in the development of fraud cases and is likely to be unavailable at that stage of an investigation.)

Touring the Premises

-- A tour of the business premises may not give you all the answers that you will need later, but it more than likely will give you a good idea of the taxpayer's life style. In addition, by requesting the tour of the business you may get the opportunity to talk to the taxpayer, which may not be available to you in the future. During the tour of the business you will need to look for the following types of items:

1. If the taxpayer has numerous vehicles on the depreciation schedule, does he or she have a place to park them at night? There could be personal expenses on the vehicles.

2. Are there employees' cars parked at the premises during the day?

3. Does the taxpayer have power saws on the business premises?

4. Does the taxpayer have a building on the depreciation schedule? If so, what is its use?

5. Is the residence of the reforestation contractor consistent with the amount of net income reported on the Schedule C?

6. Does the contractor own a home? If so, is he or she filing a Schedule A?