IRS Expected to Audit 50% More Small Businesses in 2021

After years of low examination rates, the IRS announced it will increase audits of small businesses by 50 percent. This news comes during a time when complex tax law changes and economic stimulus programs in response to COVID-19 have made businesses’ books even more complicated than usual.

This could lead to audits and enforcement actions against businesses ranging from long-held family-owned operations to the many online businesses launched as the pandemic drags on.

A 50% increase in the number of new audits next year could still mean that the agency has a long way to go to resume higher audit ratios, because it’s starting from a low base. The IRS audited only 140 partnership returns of the more than 4 million returns filed in 2018 — less than 0.00004% — according to the most recent data from the agency. That’s down from about 0.5% of partnership returns that were audited in 2010.

For S corporations, another type of pass-through entity, the IRS audited 397 returns — roughly 0.01% of all filed — in 2018, according to agency data.

New audit procedures that Congress approved in 2015 mean that the IRS can more easily collect any underpaid taxes it finds during the audit. Instead of having to track down each investor, the IRS can now collect the money from the partnership itself.

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