The IRS announced that it intends to ramp up its audits of small businesses by 50% in the coming year. This could impact businesses of all types and sizes, from closely-held family businesses to startups that have historically drawn little IRS attention.
To help accomplish its goal, the IRS has hired 50 more specialized auditors who intend to hit the ground running beginning in February.
Pass-through entities are also on the radar of the IRS
Small businesses are not the only focus of the IRS. The agency also intends to take a closer look at investor returns related to pass-through entities, such as S corporations and LLCs. Pass-through entities are not separately taxed. Rather, investors are responsible for reporting any profits or liabilities on their individual tax returns. However, Congress updated audit procedures in 2015, allowing the IRS to collect unpaid taxes from the pass-through entity itself, rather than having to locate individual investors.
A 50% increase in audits is still a drop in the bucket
A 50% increase in audits may seem significant. However, it’s important to keep in mind that the IRS does not perform a lot of these types of audits. In 2018, the IRS audited 140 partnership returns. 4 million partnership returns were filed in that year. In addition, the IRS audited a whopping .01% of S corporation returns in 2018.
It can be tempting to play the odds and hope your return escapes the attention of the IRS. However, doing so isn’t wise. An audit is not a pleasant experience, especially if the numbers don’t add up. That said, if your business does find itself under IRS scrutiny, it’s crucial that you seek help from a seasoned tax law professional who can help you effectively resolve your tax dispute.