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IRS Audits: Small Companies Are Being Targeted


Posted in on October 24, 2016

Recently, a report in the Washington Examiner warned that the Internal Revenue Service is targeting small businesses with unnecessary tax audits. In September, the U.S. House of Representatives Small Business Committee held a hearing to look at how the IRS is treating small business owners. One tax preparer who testified before the audit indicated the actions of the IRS essentially involve putting small businesses “through the wringer.”

IRS audits are a big problem for business owners, who could end up having to assemble years of complicated financial documents to resolve an audit that has the potential to end with a big tax bill. If your business is one of the many which is audited by the IRS, you should contact a Virginia business tax lawyer for help during the process.

Why is the IRS Targeting Small Businesses?

The IRS may be targeting small businesses because these companies are an easy target for the Internal Revenue Service to try to collect as much money as possible as efficiently and quickly as possible. The IRS is working with a downsized budget for auditing, which has placed the agency under pressure to find the easiest ways to hunt for missing tax revenue. 

Small businesses often receive the majority of their incomes in cash, which can be difficult to identify and difficult to report, so the IRS may view audits of these small businesses as providing an easy opportunity to argue that back taxes are owed due to a failure to report some of the cash coming in.

The IRS uses an algorithm to determine who to audit, based on the likelihood of those particular taxpayers underreporting income. Through the use of its algorithm, the IRS has apparently determined smaller companies, rather than larger ones, are more likely to be underpaying their share of the tax burden.

As a result, the highest number of audits were conducted of taxpayers within the lowest range of business returns. The IRS audited significantly more individual tax returns on which business income of $200,000 to $400,000 was declared, as compared with returns reporting higher amounts of business income. In fact, returns within this $200,000 to $400,000 rang accounted for 50 percent of all of the audits of upper income returns.

The IRS audits of small businesses can interfere with normal business operations of the small business owners who are targeted, and not just because of the costs and hassle involved in dealing with the IRS. The tactics that the IRS uses include contacting banks, vendors, clients, and neighbors of small business owners.

Many company owners feel intimidated by this and worry about potential damage to their reputation, so they end up giving in to the IRS and just agreeing to pay more.  These small business owners also face extensive scrutiny of all cash deposits made in banks, even when the deposits are 100 percent legitimately reportable business income.

Companies need to be prepared to deal with the IRS if the agency decides it wants to come after them. Attorney Kevin Thorn can help your company deal with an IRS audit. Call him for help as soon as possible.

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