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The IRS Is Getting Ready to Audit More Partnerships

  Sanjiv Gupta CPA  Published 

If you have a partnership including an LLC or S corporation, your chances of being selected for auditing are increasing. The Internal Revenue Service is getting ready to audit more LLCs and S corps than they have ever done before.

In the upcoming years, the IRS is planning on shifting the focus on business auditing from corporations and start concentrating on “pass-through” entities. This shift information comes from the head of the Internal Revenue Services’ Self-Employed and Small Business division, Faris Fink, at a recent American Institute of CPAs’ National Tax Conference. The reason for the shift is because partnerships have become more complex. The Internal Revenue Service sees partnerships as a business type that has many opportunities for potential tax fraud.

For a long time, the IRS has focused all of its energy on looking into corporations. According to Mr. Fink, the IRS is behind the curve when it comes to developing a strategy for looking into partnerships.

Approximately 95% of all the businesses have a pass-through structure including sole proprietors, S corps and LLCs according to official Internal Revenue Service data. With pass-through entities, the income earned flows directly down to the taxpayer. Bloomberg reported between the years 2007 and 2011, the number of pass-through entities grew 15.3%.

Over the years, partnerships have gotten increasingly complex. There are some partnerships that have various tiers and even thousands of partners. These issues make the chances of fraud much more likely according to Mr. Fink. The Internal Revenue Service has started training its auditors on the best way to evaluate pass-through entities so they will be able to identify any red flags.

In 2012, the Internal Revenue Service audited only a small amount of partnerships tax returns, approximately .5%. That is compared with the 1.6% of corporate tax returns and 1% of individual tax returns.

In small business tax and audit news, the Internal Revenue Service announced recently that it would start allowing small businesses that had less than $10 million dollars in revenue the ability to request a fast track settlement. This fast track settlement is similar to what midsize and large businesses have had the ability to do. The rule would let small businesses appeal audits early and they can get resolution in 60 days or less instead of having to wait for the audit to be complete. CNN money sources state that it can take many years for an audit to be officially complete. This is a huge benefit for small businesses.  

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