Title: 
Headings: CHILD CARE PROVIDER Audit Technique Guide
CHILD
 
CARE
 
PROVIDER
 

Audit
 
Technique
 
Guide
 

Purpose
 

Definitions:
 
Types
 
of
 
Child
 
Care
 
Providers
 

Topic
 
756
 
-
 
Employment
 
Taxes
 
for
 
Household
 
Employees.
 
Most
 
states
 
do
 
not
 
regulate
 

The
 
National
 
Resource
 
Center
 
for
 
Health
 
and
 
Safety
 
in
 
Child
 
Care
 
and
 
Early
 
Education
 

Status
 

Income
 
Issues
 

Introduction
 

Income
 
Audit
 
Techniques
 

Interview
 

Income
 
from
 
Records
 

Reconstruction
 
Methods
 
to
 
Verify
 
Income
 
or
 
Reconstruct
 
Income
 

“Kith
 
and
 
Kin”
 
type
 
where
 
no
 
records
 
exist
 

Facts:
  

Computation
 
and
 
Adjustment:
 

Facts:
  

The
 
computation,
 
using
 
the
 
facts
 
above
 
is
 
as
 
follows:
  

Food
 
Program
 
Reimbursements
 
(CACFP)
 

How
 
to
 
Report
 
Food
 
Reimbursement
 
Payments
 

Other
 
Income
 

Expense
 
Issues:
 

Introduction
 
to
 
Expenses
 
–
 
Determining
 
the
 
deductible
 
amount
 
under
 
IRC
 
Section
 
162
 
and
 
the
 
business
 
usage
 
percentage
 
in
 
child
 
care
 
provider
 
businesses
 

Substantiation
 
Requirements
 
of
 
IRC
 
Section
 
274(d)
 
and
 
IRC
 
Regulation
 
1.274-5T
 

Entertainment,
 
Gifts
 
and
 
Car
 
Expenses)
 
and
 
Publication
 
946
 
(Depreciation
 
(section
 
on
 

Depreciation
 

Challenges:
 
An
 
Examiner
 
is
 
faced
 
with
 
two
 
main
 
concerns
 
in
 
addition
 
to
 
whether
 
the
 
expense
 
is
 
ordinary
 
and
 
necessary
 
under
 
IRC
 
Section
 
162:
 

Vehicle
 
(Car
 
and
 
Truck)
 
Expense
 

Travel,
 
Meals,
 
Entertainment
 

Food
 
Expense
 

Publication
 
15-B,
 
Employer's
 
Tax
 
Guide
 
to
 
Fringe
 
Benefits.
 

Business
 
Use
 
of
 
the
 
Home:
   

Introduction
 

Requirements
 
to
 
Qualify
 
for
 
Business
 
Use
 
of
 
Home
 
Deduction
 
for
 
Day
 
Care
 
Facilities
 
(Regulatory)
 

Limitation
 
on
 
Deduction
 
(Regulatory)
 

Regular
 
Use
 
Versus
 
Exclusive
 
Use
 

Determining
 
Business
 
Percentage
 

Space
 
Percentage
 
(Form
 
8829
 
Part
 
I
 
lines
 
1-3)
 

Time
 
Percentage
 
(Form
 
8829
 
Part
 
I
 
lines
 
4-6)
 

Figuring
 
the
 
Allowable
 
Deduction:
 

Tax
 
Exempt
 
Income
 
Used
 
for
 
Payment
 
of
 
Housing
 
Used
 
in
 
Day
 
Care:
 

Depreciation
 
of
 
the
 
Home
 

Modifications
 
to
 
the
 
Home
 

Sale
 
of
 
Home
 

Toys
 

Advertising
 

Bad
 
Debts
 

Commissions
 
and
 
Fees
 

Employee
 
Benefit
 
Program/Pension
 
and
 
Profit
 
Sharing
 

Insurance
 

Office
 
Expenses
 
and
 
Supplies
 

Rent
 

Start-Up
 
Costs
 
(paid
 
or
 
incurred
 
after
 
October
 
22,
 
2004)
 

Organizational
 
Costs
 
of
 
Corporations
 
or
 
Partnerships
 
(paid
 
or
 
incurred
 
after
 
October
 
22,
 
2004)
 

Telephone
 
Expense
 

Utilities
 

Bank
 
Charges
 

Gifts
 

Other
 
Expenses
 

Wages/Compensation
 

Employee
 
Versus
 
Independent
 
Contractor
 

Exhibit
 
A
 
Sample
 
IDR
 

Exhibit
 
B
 
Internal
 
Revenue
 
Regulation
 
1.280A-2(i)
 

Proposed
 
Regulation
 
1.280A-2
 
Deductibility
 
of
 
expenses
 
attributable
 
to
 
business
 
use
 
of
 
a
 
dwelling
 
unit
 
used
 
as
 
a
 
residence
 


Content: Child
 
care
 
provided
 
in
 
the
 
child’s
 
home
 
by
 
a
 
household
 
employee,
 
which
 
is
 
discussed
 
under
 
In-Home
 
Care,
 
is
 
also
 
a
 
concern. Family
 
Day
 
Care: This
 
type
 
of
 
child
 
care
 
is
 
provided
 
in
 
the
 
home
 
of
 
the
 
provider,
 
is
 
nonmedical
 
and
 
is
 
usually
 
for
 
less
 
than
 
24
 
hours. Regulations
 
differ
 
from
 
state
 
to
 
state; however,
 
most
 
states
 
regulate
 
facilities
 
that
 
care
 
for
 
more
 
than
 
four
 
children. Most
 
states
 
require
 
family
 
care
 
providers
 
to
 
have
 
criminal
 
background
 
checks,
 
preservice
 
and/or
 
ongoing
 
training
 
as
 
well
 
as
 
state
 
inspection
 
on
 
an
 
annual
 
or
 
random
 
basis. All
 
states
 
set
 
minimum
 
health,
 
safety,
 
and
 
nutrition
 
standards
 
for
 
providers. Where
 
there
 
are
 
government
 
regulatory
 
requirements,
 
the
 
provider
 
is
 
required
 
to
 
be
 
approved,
 
certified,
 
registered
 
or
 
licensed
 
under
 
the
 
applicable
 
state
 
or
 
local
 
law. [Compliance
 
with
 
regulatory
 
requirements
 
may
 
be
 
important
 
as
 
it
 
could
 
affect
 
the
 
deduction
 
for
 
the
 
business
 
use
 
of
 
the
 
home
 
(discussed
 
later)
 
under
 
Internal
 
Revenue
 
Code
 
(“IRC”)
 
Section
 
280A(c)(4).] Contact
 
the
 
applicable
 
state
 
or
 
local
 
agency
 
for
 
their
 
regulations,
 
which
 
can
 
be
 
found
 
via
 
the
 
link
 
cited
 
below.