There's no evidence at this time that the objective and analytic criteria used by IRS to determine which small businesses to audit would unfairly target particular businesses, IRS Acting Chief Daniel Werfel told the House Small Business Committee on Wednesday.
The hearing comes six weeks after the committee's chairman Sam Graves wrote to Werfel requesting information regarding how small businesses are selected for audit, the percentage of IRS audits affecting small business, the average amount recovered during such audits, and the costs of such audits.
While Werfel was unable to go into details about the auditing process, he explained that returns are first reviewed by a computer program, which scans triggers previously associated with non-compliance. Besides auditing the returns flagged by the program, IRS also audits returns randomly selected under its national research program, he said.
In 2012, IRS audited about 1.65 million returns, of which 21 percent were small business returns. This percentage has been consistent over the past three years, according to Werfel's testimony. "The 2012 small business audit rate equates to only 0.2 percent of all returns filed, and 1.3 percent of small business returns filed," he added.
Various members of Congress also questioned whether the failure to voluntarily disclose Affordable Care Act (ACA) information within the first year of its implementation would result in businesses being flagged for an audit.
Because reporting ACA-related information will be voluntary for the first year, companies that chose not to report it will not be penalized, Werfel said. He noted that the IRS will have to address those concerns and ensure that that information is not part of the algorithm used to flag returns within the first year of ACA implementation.