According to Accounting Today, the IRS recently announced that they plan to increase audits on small business tax returns by 150%. The past few tax years have seen relatively low audit rates for pass-through entities, limited liability companies, sole proprietorships, and partnerships due to the excessive time and manpower required by the IRS to conduct thorough investigations of these often complex business structures.
However, this year that will be changing, according to a recent statement made by IRS representative De Lon Harris (IRS deputy commissioner of examination for small businesses.) The IRS is hiring 50 new auditors who specialize in these kinds of returns and hopes to have them working by the end of February. They will be tasked with auditing select returns that are three years old or less. If there are significant errors within an older return, it may still be audited as well.
Auditing procedures passed by Congress in 2015 facilitate the seizure of unpaid taxes directly from partnerships. Prior to these changes, the IRS was required to collect the money from individual investors. This simplifies the collection process for returns that are found to be incorrect and in need of back tax payments.
Luckily for small business owners, since the original percentage of audits conducted was so small (Bloomberg estimates only 0.01% of all S-Corp returns and 0.00004% of partnership returns filed for the 2018 tax year were audited,) the likelihood of falling under IRS scrutiny is still low.
According to Tax Audit, some common triggers for IRS small business audits are not paying all your taxes, claiming losses year over year, underreporting sales or use taxes, deducting personal expenses on a business return, and failing to pay the correct amount of employment tax.
As with every year, the best way to protect yourself from a potential audit is to keep detailed records of your business expenses and tax payments and file your return truthfully. For help keeping your 2021 records organized and streamlining your business’s financial operations, be sure to contact Affordable Bookkeeping and Payroll to discuss what we offer. If you have any concerns about your 2020 return, your tax professional can help you prepare your documents accurately.