The IRS budget is being cut. Think that means your organization is less likely to be audited? That’s a hard question to answer.
The IRS audited only 0.49 percent of business tax filings, according to USA Today—that includes large and small corporations, partnerships and subchapter S returns. “That represents the lowest rate since the 0.36 percent rate in 2004,” the paper added. But there are still hot spots that the IRS is focusing on, and one of them is use of incorrect Taxpayer Identification Numbers (TINs).
Though Audits Are Down, IRS Funding Is Up
Will that downward trend be reversing? After five straight years of budget cuts, the agency received an additional $290 million from Congress in 2016 and 2017. IRS Commissioner Josh Koskinen said this spring that he’s continuing to push for more funding and that the agency is doing more with less—but that exam rates are still falling.
“Exam rates are continuing their downward trend in all categories—individuals, small businesses and large corporations,” he said. “These workforce cuts mean that the government is forgoing billions to achieve budget savings of a few hundred million dollars, since we estimate that every $1 invested in the IRS budget produces $5 or more in revenue.”
Audit Triggers: Too Many Deductions and Incorrect TINs
Less money for audits may seem like a win for companies that must use Form 1099 to report employees’ income, but your organization’s chances of being audited vary according to what type of return is filed, the IRS reports. The IRS audited 1.1 percent of corporation income tax returns filed for the 2015 tax year. For corporate returns, corporations earning less than $1 million had a 1 percent audit rate; for corporations earning $20 billion or more the rate was 78 percent.
In general, the same factors that can trigger a personal return audit can also trigger a business filing audit: higher than average income, rounded or averaged numbers, always claiming business losses, and too many deductions—especially ones for home offices and “business entertainment,” according to a post on the Intuit Quickbooks blog.
Another audit trigger is filing an incorrect TIN notes one tax team at Wolters Kluwer. “If there is a discrepancy between the number you provide, and that provided to the IRS by the TIN issuer (such as the Social Security Administration), the IRS will assume that the information provided by the TIN issuer is valid and treat your return as if you omitted a valid number,” states the tip sheet from Wolters Kluwer. “The IRS can then use the math error procedure to summarily assess any additional taxes due as a result of the disallowed credits.”
Pro Tips for Reducing Your Audit Risk
Industry veteran Mary S. Schaeffer says that accountants, controllers, tax managers, payroll managers, accounts payable employees and accounting managers need to realize that now more than ever it’s important for companies to use best practices for collecting and reporting tax information—especially when it comes to taxpayer identification number solicitation. Failing to take the TIN seriously, Schaeffer warns, could result in an IRS audit.
Schaeffer’s conference for Eli Financial, “TIN Solicitation Best Practices,” covers how to identify the required TIN information you need to collect, how to design a best-practice TIN solicitation process, how to recognize outdated TIN collection practices and how to determine who should sign up for IRS TIN Matching.
