According to a report by the Treasury Inspector General for Tax Administration, IRS audits of tax reporting by small businesses render the largest adjustments to taxable income. The TIGTA findings point to likely targeting by the IRS of more business tax returns. Tax experts with Enrolled Agent training can help in a number of ways.
Enrolled Agents seem to have already deployed their expertise in helping many taxpayers avoid IRS audit difficulties. Approximately one-third of all audits resulted in no adjustments during the 2009 through 2011 government fiscal years.
However, a few partnerships and S corporations incurred substantial changes upon IRS audit. Knowledgeable advisers with EA certification can aid these entities with both negotiations of tax debt dispositions plus recommendations for improved future record keeping.
The IRS has several methods of selecting tax returns for audit. The best known is the discriminant index function system, which uses a formula to score returns for potential adjustment. The TIGTA found that the DIF system has recently been an unreliable audit selection platform. A large percentage of audits identified by the DIF method resulted in no tax changes.
However, not every business was following sound tax reporting procedures. Most of the partnerships and S corporations selected for audit by other means than DIF scores did experience IRS adjustments. Targeting abusive transactions was particularly beneficial for identifying large percentages of tax returns with audit adjustments. Hence, a significant need still exists for tax professionals with valuable Enrolled Agent course knowledge. Moreover, the amounts of audit adjustments were substantial – averaging six figures for both partnerships and S corporations.
As the IRS pursues improved audit selection methods, more Enrolled Agent jobs are anticipated. EA advice is especially crucial for small businesses to avoid audits before they happen. The TIGTA pointed out the potential for audit selection using the IRS Business Return Transaction File, which contains all transcribed items from partnership and corporation tax returns. The IRS also has at its disposal the Audit Information Management System. This database holds the tax results of partnerships and S corporations.
Improved IRS productivity aims to identify business characteristics that most often lead to audit adjustments. The next step is searching IRS data for all partnerships and S corporations with those traits. A similar approach is possible when solving EA problems for these business entities. Enrolled Agents can recognize partnerships and S corporations that are most vulnerable to IRS audit and focus on rendering solutions for them.
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Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.