Watch Out: The IRS Is Cracking Down On Partnerships

The Internal Revenue Service is gearing up to audit more S corps and LLCs than ever before.
November 12, 2013

If your business operates as a partnership, such as an S corporation or LLC, your odds of being audited appear to be rising.

The Internal Revenue Service plans to shift its business auditing focus away from corporations and concentrate more on “pass-through” entities in coming years, Faris Fink, head of the IRS’s Small Business/Self-Employed Division, recently told conference attendees. The reason: Partnerships are becoming more complex, and the IRS sees them as a type of business ripe for tax-fraud potential.

“The Service has for a long time focused its energy on corporations,” Fink said at the American Institute of CPAs’ National Tax Conference, according to Bloomberg. “Frankly, we’re a little bit behind the curve in getting around to developing a partnership strategy.”

According to IRS data, about 95 percent of businesses are structured as “pass-through” entities, such as S corps, LLCs or sole proprietors, where business income flows down to the individuals who pay taxes on it. The number of these types of entities grew 15.3 percent between 2007 and 2011, Bloomberg reported.

Overall, partnerships have gotten more complex and sometimes have thousands of partners and various tiers, making them more susceptible to fraud, Fink said. The IRS has been training its auditors on how to better evaluate these structures and identify red flags.

The IRS has audited very few partnership returns—only 0.5 percent in 2012—according to the IRS Data Book. That’s compared with 1.6 percent of corporate returns and 1 percent of individual taxpayer returns.

In other small-business tax audit news, the IRS also recently  announced that it would allow small businesses with under $10 million in revenues to request fast-track settlement, similar to what large and midsize businesses have been able to do. The new rule would allow small businesses to appeal their audits early and get resolution within 60 days rather than having to wait until an audit is complete, which can take years, according to CNN Money.

Read more articles on the IRS.

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