The Internal Revenue Service (IRS) is planning to bump up its audits of small businesses as well as their investors by around 50% this year. In part, this is due to years of consistently low rates of examination among small businesses.

According to this story from Bloomberg, a surge in audits is expected and will be for “companies ranging from mom-and-pop retail stores and technology startups to investment funds that have historically faced only infrequent checks thanks to the time and effort required at the IRS.”

Why is the IRS increasing small business audits?

In the aforementioned article, IRS deputy commissioner of examination for small businesses, De Lon Harris, suggests that the reason for the increase in audits is because the IRS is focusing their efforts on increasing compliance among partnerships, as well as investor relations that are related to pass-throughs.

Why is the IRS focused on partnerships and pass-throughs?

Namely, this is directly related to the complex structures these business types are often made up of and the difficulty to audit them. These business types can often include multiple interrelated entities within the business itself. Because of this, these complex structures make it more difficult for the IRS to conduct audits.

Pass-through entities (also called flow-through entities) do not pay taxes themselves. Rather, profits and tax liabilities are “passed on” on to their investors. Those investors then pay taxes on their own individual tax returns.

Pass-throughs may include not only partnerships, but also LLCs (limited liability companies), as well as sole-proprietorships.

What else should I know as a business owner?

As part of the increase in audits by the IRS, here are a few other important things to keep in mind for your business:

  • The IRS is able select returns to audit that are up to three (3) years old.
  • In the event the IRS audit discovers significant problems in a taxpayer’s return filing, older tax returns (older than three years) may be examined.
  • The IRS is able to collect tax money owed directly from the partnership itself, versus from its investors.

Questions about how this affects your small business?

As a business owner, we understand how important it is to be compliant with the IRS and your taxes. As such an important aspect of running your business, we want to ensure you have a strong understanding of any changes in the law the may affect your business. But we also understand that questions come up. So if you do have questions about how these changes may impact your business, we encourage you to contact us to speak with one of our business attorneys who can help.

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