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Avoiding Audits for Small Businesses



The IRS has defined eight areas preparers should focus on to help clients avoid audits.

Small businesses are responsible for 84 percent of the $450 billion tax gap and the IRS believes that’s due in part to underreporting.  In an effort to increase compliance, the IRS will focus on eight specific areas that could red flag a small business for an audit. If you have small business clients who may fall subject to any of the following issues, be proactive and address these areas now to prevent future problems.

  1. Fringe benefits.  The IRS has found that employers are not reporting personal use of company vehicles on Forms 1099 or W-2 and plan to investigate the use of all company cars – especially luxury autos – in its audits.
  2. Total positive income.  The IRS will focus on those small businesses who have a total positive income of more than $1 million (this includes all gross receipts and all sources of income before expenses and deductions) and file a Schedule C business return.  Last year, 12.5 percent of all individuals with incomes of more than $1 million were audited.
  3. Form 1099-K matching. The IRS has indicated it plans to pilot a business-matching program, starting with Form 1099-K, which they believe will address a large portion of small business noncompliance.
  4. Small business employee health insurance credit.  Eligibility requirements for small business employers and tax exempts for the small business employee health insurance credit under Section 45R will face scrutiny this year.  The IRS will examine small business employers and tax exempts to make sure they meet all eligibility requirements. .
  5. International transactions. The IRS will be looking to aggressively pursue taxpayers who hide assets overseas and focus on offshore transactions for both large and small businesses.  This focus in an attempt to lessen the international tax gap.
  6. Partnerships with unreported income.  The IRS plans to target partnership who claim a loss, have unreported income, or present abusive transactions.
  7. Compensation for S-Corporation officers.  S-Corporations who report a loss in excess of basis on shareholder returns will be reviewed by the IRS to determine whether tax preparers and completing due diligence requirements.  They will focus on S-Corporations with income, distributions, and little or no salary paid to officers.
  8. Worker classification.  The IRS believes a lot of small businesses report workers as independent contractors rather than employees and feels there is significant noncompliance in worker classification. This, obviously, creates employment tax issues and the IRS plans to continue to focus their field examination resources in this area.

 

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