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Control Environment

IRS IRC § 42 Audit Technique Guide — Part I (Introduction and Pre-Contact Analysis) · 2026 edition · updated 2026-07-29 · United States

The control environment is composed of the factors that affect the taxpayer's policies and procedures; e.g., management philosophy and style, personnel policies, and organization structures.

Prepare a diagram of the ownership structure and identify entities and individuals who are responsible for or participated in the development and/or on-going operation of the IRC §42 project. Once all the entities are identified, determine each entity's responsibilities and whether there are sufficient controls between the entities to allow for the compiling and maintaining of reliable information with respect to the project.

Generally, IRC §42 projects are owned by partnerships. It is not uncommon for a general partner to own a financial interest in the entity that develops the project, the entity that manages the project, or some other entity within the partnership structure. The presence of related entities can defeat the validity of many internal controls that appear to be in place, as the related entities are in a position to exert influence on the business decisions of the related entities. If related parties are identified, analyze all transactions between the parties.

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▸Contents — IRS IRC § 42 Audit Technique Guide — Part I (Introduction and Pre-Contact Analysis)
IRS IRC § 42 Audit Technique Guide — Part I (Introduction and Pre-Contact Analysis)

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