Expect IRS Correspondence Audits of Small Business and Self-Employed to Expand into Multiple Year IRS Audits

The IRS itself is audited by the Treasury Inspector General for Tax Administration (TIGTA).  And in the most recent audit, TIGTA suggests that IRS Correspondence Audits should be expanded to  audit taxpayers for multiple years if it discovers that additional taxes are owed in one year.

 WHAT TIGTA DID

The audit was intended to identify the effectiveness of IRS correspondence audits in the Small Business / Self-Employed Division.

 WHAT TIGTA FOUND

In a statistical sample of 7,470 single-year correspondence audits, in which the taxpayers agreed that additional tax amounts were due, over 40% had similar tax issues in the other years not audited.  Example:  a correspondence audit identifies your business owes additional tax for 2012.  The IRS auditors were not going back to 2011 and 2010 to review if the same issues existed.  TIGTA found the same issues existed in 40% of the cases.  IRS has concurred with the TIGTA recommendation to change IRS procedures to expand the audits.  The full report may be found here, if you find yourself sleepless one night.

 IMPACT ON YOU, THE TAXPAYER

The IRS relies heavily on the correspondence audit process which results in significant additional tax assessments.  Taxpayers can expect that if a tax return is audited and additional taxes are due, then the IRS will expand the audit to multiple years (prior and subsequent to the audit year) still open under the statute of limitations.  Generally, the statue of limitations is 3 years from the date filed; in exceptional cases where income has been understated by more than 25%, the statue is extended to 6 years.

RECOMMENDED ACTIONS

We do our very best to reduce your exposure to audit by considering carefully the presentation and structure of your transactions.  This is one reason why we prefer to report all business activities in separately filed  partnership tax returns (for LLCs) and S corporation returns.  The simpler we can make your personal tax return, the lower the risk of audit - critically important now that multiple year audits will be the norm if an adjustment is discovered.