Why Is the Right Business Activity Code Important to the IRS?
According to the IRS, classifying a business facilitates the administration of the Internal Revenue Code. Practically speaking, the business activity code helps the IRS to determine for auditing purposes what is the right comparison group for a business. The IRS uses computer programs to compare financial ratios of a business with the same ratios for a comparable grouping of businesses in the same industry and within the general size range. Companies that show substantially different ratios from the average for their industry group are more likely to be flagged for further scrutiny. For the IRS, the more accurate the activity code designations are, the better this screening process will work. The IRS does not rely solely upon the business activity codes for categorization. They also request a brief description of the companys principal business activity and of the companys principal product or service.
