Report: Majority of IRS S-Corp Audits Fruitless

July 31, 2012

Last week, the Treasury Inspector General for Tax Administration (TIGTA) Russell George released a new report outlining Internal Revenue Service (IRS) audits on S-corporations. The TIGTA is the top watch-dog over the IRS, charged with promoting and protecting fair tax administration.

The report shows that, in 62 percent of audits of S-corps, the IRS audit resulted in no recommended changes whatsoever from the original report filed by the s-corp owner.

The report raises a red flag, said George,  because, “… a high no-change percentage means the agency is spending a significant amount of resources on unproductive audits and burdening compliant taxpayers with unnecessary audits.”

According to the report, between FY 2007 and 2011, the Small Business/Self-Employed (SB/SE) Division within IRS “…completed 53,544 audits of S corporation returns and recommended $5.7 billion in adjustments to items reported on those returns. This was a 54 percent increase over the number of S corporation returns the IRS audited in the previous five-year period (FYs 2002 through 2006).”

In light of the large dollar amount of adjustments recommended to s-corp audits in spite of the fact that the majority of audits produced no recommended adjustments, TGTA has unfortunately predicted that this “…will likely lead to an increase in the number of S corporation audits. “

Despite this eye-opening report, TIGTA did not identify any significant quality problems causing the high rate of no-change audit outcomes. The report did, however recommend that the SB/SE Division reevaluate the method of selecting s-corps for audits.

IRS officials agreed with TIGTA’s recommendations and stated that they plan to take corrective actions.

Within the context of IRS efforts to close the so-called “tax gap,” the report may shed new light on small businesses role in contributing to the gap—which is the difference between IRS estimated taxes owed and those actually paid. IRS has cited that underreporting represents about 80 percent of the total tax gap, and of that, they say small business is responsible for 66 percent.

NSBA has continually questioned these numbers and pointed to ever-increasing tax complexity as a massive burden weighing down the small-business community.

Please click here to read the report.