We have recently devoted a lot of our attention to the rising number of audits our clients are facing (see “High $ Mortgage Holders, Be Ready for Mail-In Audits” and “IRS Shifting Focus“). Yesterday, an article posted on American Express’ Openforum.com caught our attention. According to the article entitled, “Majority of IRS Audits of Small Businesses Turn Up Nothing,” 62% of small business audits (S-Corp) are resulting in “no change,” meaning in all their efforts, the IRS is turning up empty handed.
As we have discussed in previous articles, our office has seen a huge increase in client audits over the past couple of years. While we thought this article was rather interesting, it definitely wasn’t surprising. Very few of our clients walk away from an audit with additional taxes due to the government. The changes that have been made were very minor and typically involve a lack of documentation on the client’s part to substantiate deductions. As we have stated before, you are guilty until proven innocent when the IRS is involved. We cannot emphasize enough the importance of record keeping. (See “What Records Should I Keep and How Long Should I Keep My Tax Related Documents and Information” for our recommendations on record retention.)
Will the lack of findings be enough to cool down increased IRS audit efforts? This question can be given a simple, one-worded answer – No. A recent report from the Treasury Inspector General for the Tax Administration (TIGTA) states that the rise in numbers of S-Corps in recent years “presents a compliance risk because it provides shareholders with opportunities to structure transactions improperly to reduce income taxes they would otherwise owe.” Unfortunately the equation, inefficient use of resources by the IRS plus large burden placed on taxpayers does not equal a decrease in audit frequency.