October 1, 2014

IRS Steps Up Small Business Audits

Scary Tax Day NewsDisturbing news for entrepreneurs: A study from Syracuse University’s Transactional Records Access Clearinghouse (TRAC), reported in Forbes, reveals that in the last five years, the number of hours the IRS spends auditing small businesses (those with assets of $10 million or less) has increased by 30 percent. In the same time period, the time the IRS spends auditing companies with $250 million or more in assets has dropped by 33 percent.

The rate at which large corporations are audited has declined drastically, from 42.6 percent to 25 percent, in the last five years.

The auditing of corporations with assets of $5 billion or more dropped from 78 percent in 2007 to 64 percent in 2009.

The average number of hours spent on each audit of large corporations also went down, from 973 in 2005 to 830 in 2009. By contrast, the average number of hours spent on a small or midsized business audit has remained substantially the same.

TRAC’s report points out: “The decline in audits of large corporations is surprising because (1) the highest levels of misreported tax dollars per auditor hour are found among the biggest business organizations and (2) since FY 2005, Congress has provided the IRS with the funds it needs to hire an increasing number of revenue agents trained to handle these very complex returns.”

Theorizing as to why smaller companies are being targeted, TRAC writes: “Choosing to audit the smaller rather than the larger businesses would on its face help individual [IRS] agents meet their performance targets [for auditing a certain number of returns]. But the decision to audit the smaller companies does not help the government collect more taxes because the data indicate that the larger the business, the larger the dollar amounts of tax under-reporting and back taxes on average that they may owe.” In fiscal 2009 the average amount of tax “underreporting” IRS auditors uncovered per  hour spent auditing small to midsized businesses was $1,025. The average for large corporations was $9,354.

Forbes notes that the IRS focus on small business is counterproductive in many ways. First, while big corporations can pawn off the hassle of an audit onto an accounting department or managers, an audit of a small business usually requires lots of time and effort from the business owner himself or herself. And while the government is currently attempting to stimulate small-business job creation with tools such as tax credits, the news that the IRS is focusing disproportionately on small businesses is likely to scare businesses away from using such tax credits at all.

You can read the full report at TRAC’s Web site.

Editor’s Note: This article was previously published at OPENForum.com under the title: “Scary Tax News: The IRS is Auditing More Small Businesses” It is republished here with permission.

6 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

6 Reactions

  1. Anita,

    In a word;

    HAPPY.

    The Franchise King

  2. The government is looking for money and unfortunately small businesses are much easier targets than large companies with their armies of accountants and lawyers.

  3. Maybe this is part of the “Too Big to Fail” mindset in Washington?
    businessavante

  4. IRS auditor buys product from business he is auditing. Is this ethical?

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