Randolph Law Firm, P.C.

Business tax audits: IRS changing its approach

The overall number of tax audits has been going down for businesses in recent years, just as it has for individuals.

This is hardly surprising, given the impact of Congressional budget cuts on the IRS's audit capacity.

But the IRS is regrouping and making plans to focus its limited resources for business tax audits in new ways. In this post, we will update you on some of the changes to expect.

Partnership audits

The IRS is currently working on new regulations for how partnerships will be audited. The regulations are to implement rules that Congress included in the Bipartisan Budget Act of 2015.

Though the rules will not take effect until 2018, partnerships will have to opportunity to opt at any time. The rules will affect not only partnerships, but also LLCs with multiple members.

The concern is that the new rules will impose taxes not only on partners, but on the partnership itself - a type of double taxation that has historically been associated with corporations but not with partnerships.

There is an exception for "small partnerships." But the definition of "small" is fairly complicated. And overall, the changes in partnership auditing rules will make partnerships more vulnerable to tax audits.

New audit campaigns

It isn't only partnerships, however, that are facing new IRS ways of conducting audits.

There is concern in the tax community that the IRS will be less flexible going forward in allowing examination agents to use discretion to resolve issues. Instead, the IRS may developed target campaigns to more actively confront types of transactions that it considers improper.

In order to more effectively deploy its reduced resources, the IRS has already stepped up its use of information document requests (IDRs), seeking to come up with information that could potentially be used against taxpayers.

The IRS could also become more likely to issue summonses during an audit. This is a heavy-handed tactic that will not necessarily prevail if challenged.

But clearly the IRS is preparing a new approach to business tax audits and taxpayers need to be ready to respond.

 

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