ACCOUNTING

Small Businesses More Likely to Be Audited

As part of a broader enforcement effort, the IRS increased audits of S corporations by 34 percent this year.
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The Internal Revenue Service is cracking down on small businesses that don't pay their taxes.

The IRS increased S corporation audits by 34 percent and partnership audits by 15 percent in 2006 as part of a multi-faceted effort to close the federal tax gap -- the estimated $345 billion difference between taxes owed and taxes paid to the government.

S corporations are typically small businesses that allow profits to pass through to the owners, who are then required to report them on their personal tax returns. Many partnerships share this system of flow-through returns.

"We have placed more emphasis in the growing area of these flow-through returns involving S corporations and partnerships," IRS Commissioner Mark Everson said in a statement, noting that S corporation audits are at their highest level since 2000, and audits of partnerships are now at their highest level since 1998.

By contrast, 2006 audits of larger corporations -- those with more than $10 million in assets -- dropped by 2.2 percent from a year earlier.

According to the Government Accountability Office, the IRS collected a record $48.7 billion in enforcement revenue during the 2006 fiscal year, ending in September. While that represents a 3 percent increase over the previous year, it is still short of the hundreds of billions owed to the federal government.

An IRS study in January found that small businesses are among the worst culprits. Despite an overall compliance rate of 82 percent, individual taxpayers reported only an estimated 57 percent of business income.

As a result, the last fiscal year saw enforcement efforts focused on smaller companies. The IRS, however, also increased the size of its enforcement staff, increased field audits by almost 23 percent, and targeted very wealthy individuals, with an 18 percent increase in high-income audits.

Last updated: Nov 27, 2006




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