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At a time when a large number of small businesses are already experiencing difficult economic circumstances, representatives from the Internal Revenue Service have signaled that audits of partnerships and pass-through entities will increase in 2021. More granularly, the IRS has hired 50 new specialized auditors who are expected to be installed sometime in February 2021.
If you currently own or operate a small business, you understand both the precarious state of the U.S. economy and the complexities involved in accepting relief from various programs (like the popular Paycheck Protection Program). Clues about how the IRS and other federal agencies will prosecute PPP fraud have been trickling in the past few months; the indications are that companies with unclear bookkeeping are vulnerable to investigations.
Audit Rates Have Been Historically Low
Fortunately for small business owners, the 50 percent increase in audits is still miniscule relative to the amount of audits the IRS performed in 2018. Take, for instance, S corporations, an entity that allows owners to enjoy pass-through taxation. The IRS audited fewer than 400 tax returns for that type of entity in 2018, which comes out to 0.01 percent of all S corporation filings. In another illustration of just how slim the chances are of getting audited, consider that 0.00004 percent partnership tax returns were audited the same year. So, despite the fact that audits are expected to increase in 2021, your chances of your company getting audited have not drastically increased.
The IRS’ New Posture Might Not Be an Aberration
As a new administration comes to power in D.C., it’s worthwhile to keep an eye on cabinet nominations and policy proposals — especially now that one political party is in control of both institutions of Congress and the White House. In particular, there are indications that Janet Yellen, the nominee for Secretary of the Treasury, might want to direct money to the IRS to beef up enforcement.
What Can You Do to Prepare?
The salient piece of advice for business owners is to keep thorough and clear financial records, in addition to relevant documentation. Remember, the IRS can audit tax returns from up to three years in the past. Read up on the requirements for how you’re permitted to spend PPP funds if you received any. And, if you think an audit is imminent for you and your business, contact an attorney right away — especially if you have already been contacted by the IRS.
Weisberg Kainen Mark specializes in settling disputes between the IRS and taxpayers, including representation for clients facing criminal charges. Call us at (305) 374-5544 to set up a consultation with our team.
Weisberg Kainen Mark, PL
